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ECONOMICS 


•y^y^' 


ECONOMICS 


BY 


EDWARD   THOMAS    DEVINE,  Ph.D. 

GENERAL  SECRETARY  OF  THE  CHARITY  ORGANIZATION 

SOCIETY  OF  THE  CITY  OF  NEW  YORK 

SOMETIME  FELLOW  IN  THE  UNIVERSITY  OF  PENNSYLVANIA,  AND 

STAFF  LECTURER  OF  THE   AMERICAN  SOCIETY   FOR  THE 

EXTENSION  OF  UNIVERSITY  TEACHING 


THE   MACMILLAN    COMPANY 

LONDON:   MACMILLAN  &  CO.,  Ltd. 
1898 

All  rights  reserved 


Copyright,  1898, 
By  the  MACMILLAN  COMPANY. 


GENERAL 


Norfajoolr  ^^regg 

J.  S.  Gushing  &  Co.  —  Berwick  &  Smith 
Norwood  Masi.  U.S.A. 


PREFACE 

Several  chapters  of  this  book  were  origi- 
nally printed  as  lessons  on  Economics  in  Uni- 
versity Extension^  a  magazine  published  in  the 
interests  of  the  movement  for  the  Extension  of 
University  Teaching.  Those  chapters,  in  a 
somewhat  expanded  form,  were  submitted  as  a 
thesis  to  the  University  of  Pennsylvania  in 
1893.  Other  portions  have  appeared  as  Uni- 
versity Extension  courses  at  the  Oxford  (Eng- 
land) Summer  Meeting  and  in  various  centres 
of  the  American  Society. 

The  presentation  of  the  entire  subject,  while 
influenced  in  great  measure  by  such  contact 
with  students  who  approach  the  subject  from 
active  life,  is  intended  also  for  the  class  room  of 
the  college  and  high  school.  The  inspiration 
which,  in  common  with  scores  of  the  younger 
generation  of  economic  students,  the  author  has 

V 

96020 


VI  PREFACE 

received  from  "  that  prince  of  teachers,"  Simon 
N.  Patten,  Professor  of  Political  Economy  in 
the  University  of  Pennsylvania,  will  be  suf- 
ficiently obvious  to  any  reader  of  the  current 
literature  of  the  subject. 

New  York,  1898. 


CONTENTS 


I.  The  Economic  Man 

II.  The  Economic  Environment  . 

III.  The  Social  Conditions  of  an  Economic 

Society 

IV.  The  Making  of  Goods    . 
V.  The  Consumption  of  Goods  . 

VI.  Propositions    concerning   Consumption 

VII.  Social  Prosperity  .... 

VIII.  The  Standard  of  Living 

IX.  Value 

X.  The  Distribution  of  Products 

XI.  Money 

XII.  The  Organization  of  CrediTj 

Xfll.  The  Organization  of  Industry     . 

XIV.  Propositions  concerning  Industry 

XV.  Restatement  of  Familiar  Principles 

XVI.  Obstacles  to  Social  Progress 

XVII.  Disposition  of  the  Social  Surplus 


I 

i6 

45 
60 

73 

93 

112 

143 
154 
178 
211 

239 
261 

300 
323 
356 


ECONOMICS 

CHAPTER   I 

THE    ECONOMIC    MAN 

Economics  is  the  science  of  man  in  his  rela- 
tion to  wealth.  By  wealth  is  meant,  not  as  in 
common  speech,  a  large  quantity  of  desirable 
goods,  but  rather  all  desirable  things  in  quan- 
tity great  or  small.  The  unit  in  economic  ob- 
servations and  reasonings  is  man  as  a  member 
of  a  wealth-producing  and  wealth-using  com- 
munity. The  terms  used  in  the  study  imply 
human  needs,  relations,  and  activities.  The  man 
who  is  of  interest  to  the  economist  has  need  of 
goods,  some  of  which  are  given  free  by  nature, 
some  like  natural  fruits,  given  free  by  the  com- 
munity in  which  he  lives,  some  like  the  farmer's 
grain,  produced  by  his  own  efforts,  and  some 
like  the  food  on  the  mechanic's  table,  given  by 
the  community  in  return  for  the  product  of  his 

B  I 


2  ECONOMICS 

labor.  The  economic  man  has  the  capacity  for 
performing  useful  service  of  some  sort,  and  for 
uniting  with  his  fellow-beings  on  some  sensible 
basis  for  mutual  exchange  of  services.  A  pre- 
liminary description  of  the  economic  man  is 
necessary :  for  a  mastery  of  this  single  expres- 
sion is  to  the  economist  what  an  intelligent 
appreciation  of  the  character  of  the  cell  is  to 
the  biologist,  or  an  understanding  of  the  school 
of  the  soldier  to  the  student  of  military  tactics. 

/  The  economic  man,  then,  is  a  human  being. 
The  term  is  generic,  including  both  men  and 
women  ;  not  merely  those  who  are  usually  called 
breadwinners,  but  also  the  bread  preparers. 
Men  and  women  may  do  different  work,  their  f 
place  in  the  economic  world  may  be  distinct,^  i 
but  both  are  included  in  the  term  by  which  we 
designate  the  unit  with  which  our  study  deals. 

The  economic  man,  secondly,  has  material 
and  spiritual  wants  which  are  satisfied  by  means 
of  goods.  The  quantity  and  character  of  goods 
desired  may  vary  widely  at  different  times  and 

*  See  Economic  Function  of  IVoman,  by  the  present  author, 
Publications  of  the  American  Academy  of  Political  and  Social 
Science. 


THE  ECONOMIC  MAN  3 

places,  furnishing  an  indication  in  each  case  of 
the  particular  kind  of  economic  man  then  and 
there  to  be  found.  Some  wants,  however,  are 
universal.  Of  these,  food  is  first  in  importance, 
and  has  sometimes  been  taken  by  a  figure  of 
speech  as  a  collective  expression  for  all  the 
goods  required  to  supply  man's  wants.  This  is 
done,  for  example,  by  the  economists  who  trace 
a  connection  between  the  wages  paid  to  labor- 
ers and  the  cost  of  food.  Strictly  speaking,  the 
relation  is  between  wages  and  the  cost  of  living. 
Next  in  importance  are  shelter  and  clothing, 
though  in  point  of  time  ornaments  are  perhaps 
desired  at  an  even  earlier  stage.  Human  asso- 
ciation and  religious  worship  are  among  the 
most  primitive  goods,  and  these  desires  remain 
of  chief  importance  in  every  stage  of  civiliza- 
tion with  which  we  are  familiar.  Besides  these 
fundamental  wants  there  are  innumerable  spe- 
cial desires  and  a  class  of  goods  to  correspond 
to  each,  however  fantastic  or  however  common. 
!  Man  as  the  object  of  economic  inquiries,  hav- 
ing human  desires,  has  also  human  capacities. 
Infants,  idiots,  idlers,  invalids,  and  criminals  are 
excluded  more  or  less  completely  in  accordance 


4  ECONOMICS 

[with  the  degree  of  their  incapacity.  Those  who 
are  entirely  dependent,  and  those  whose  natures 
are  so  perverted  that  society  cannot  afford  to 
give  them  an  opportunity  for  the  free  exercise 
of  their  powers,  are  not  to  be  regarded,  for 
purposes  of  economic  study,  as  integers  in  hu- 
man society.  Their  presence  raises  many  inter- 
esting economic  (Questions,  but  they  are  not, 
themselves  economic  meno  lit  is  obvious  that 
different  economists  may  have  different  views  of 
the  exact  place  where  the  line  separating  eco- 
nomic men  from  dependents  should  be  drawn, 
and  that  some  writers  may  not  take  the  trouble 
to  think  out  the  distinction  carefully,  leaving 
even  themselves  in  uncertainty  whether,  for  ex- 
ample, persons  supported  in  part  by  their 
own  efforts  and  in  part  by  charity  ^  are  or  are 
not  included  in  the  observations  which  they 
make.  \Probably  it  would  be  most  satisfactory 
to  draw  the  line  sharply  between  the  economic 
man  and  the  social  debtor,  including  in  the  first 
class  only  those  whose  withdrawal  would  be  felt 
to  be  a  real  economic  loss  to  the  community, 

1  In  England  at  one  time  nearly  all  common  laborers  received 
public  relief  at  some  period  of  their  lives. 


THE   ECONOMIC  MAN  5 

and  in  the  second  class  all  who  live  upon  othejs.^ 
Immense  consequences  flow  from  this  distinc- 
tion. It  has  been  recognized  tacitly  by  many  of 
the  writers  on  economic  subjects.  Careless  crit- 
ics, failing  to  discover  that  the  economists  were 
thinking  only  of  the  real  members  of  economic 
society  and  not  of  the  social  debtors,  have  de- 
clared that  their  principles  were  false,  because 
they  did  not  apply  to  this  or  that  special  class, 
when  in  all  probability  the  principles  should  have 
been  applied  only  to  the  free  and  effective 
workers,  the  intelligent  users  of  wealth,  to  the 
economic  man  whose  desires  and  capacities 
are  normal. 

We  may  find  a  useful  comparison  in  civic  re- 
lations. The  citizen  is  one  who  is  a  member  in 
full  standing  of  the  political  community,  who 
may  claim  the  usual  rights,  and  expects  to  per- 
form the  ordinary  duties  of  citizenship.  Nearly 
all  nations  have  tolerated  the  presence  of  other 
persons  who  share  in  the  protection  of  the 
government,  who  are  required  to  obey  its  laws, 
and  who  may  have  certain  civil  rights  which 
may  be  taken  away,  however,  or  modified  with- 
out their  consent. 


6  ECONOMICS 

The  distinction  between  the  economic  man 
and  the  social  debtor  is  somewhat  similar.  The 
great  body  of  the  active  workers  throughout  the 
world,  whether  day-laborers,  skilled  mechanics, 
merchants,  or  brain-workers,  constitute  a  solid 
industrial  community,  each  part  connected  by 
numerous  bonds  with  every  other  part,  each 
member  contributing  something  that  will  satisfy 
the  wants  of  himself  or  of  others,  and  each  aid- 
ing to  some  extent  to  determine  what  kind  of 
goods  he  himself  and  others  who  are  at  work 
shall  produce.  Excluded  from  this  body  by 
their  failure  to  make  any  such  contribution  are 
the  social  debtors  —  the  idlers,  the  inefficient, 
the  industrial  failures.  Their  failure  may  be 
due  to  natural  weakness,  or  to  misfortune,  or  to 
a  criminal  unwillingness  to  take  part  in  honest 
toil.  There  is  no  law  or  constitutional  provision 
excluding  them  as  a  class  from  the  industrial 
world,  and  nearly  all  who  are  able  to  work  at  all 
are  at  times  persuaded  or  compelled  to  do  so. 
But  their  work  is  irregular  and  of  little  value, 
and  in  large  part  they  rely  upon  the  bounty  of 
others  who  are  united  to  them  by  social  or  reli- 
gious ties,  or  upon  the  care  given  by  the  state. 


THE  ECONOMIC  MAN  7 

When  they  are  employed,  they  are  apt  to  receive 
from  motives  of  pity  or  for  other  reasons  more 
than  they  really  earn,  thus  concealing  the  ex- 
tent to  which  they  are  supported  by  the  active 
workers. 

It  must  not  be  thought  that  all  social  debtors 
are  blameworthy.  Those  who  are  at  one  time 
dependent  may  have  done  useful  work  at  some 
previous  time.  Many  who  appear  to  be  com- 
pletely disabled  are  nevertheless  producers  be- 
cause they  influence  and  stimulate  the  efforts  of 
others.  Young  children  might  be  thought 
equally  useless  with  those  whom  we  have  called 
social  debtors,  but  excepting  those  who  are  to 
remain  useless  all  their  lives  it  is  better  to 
regard  them  as  workers  in  preparation.  Our 
attention  is  directed  toward  their  development 
into  healthy,  well-balanced,  useful  members  of 
the  community,  and  it  is  expected  that  they 
will  gradually  fit  into  their  natural  places  of 
economic  activity,  first  in  their  own  homes,  and 
then  in  some  chosen  occupation  for  which  they 
will  have  been  prepared. 

Perhaps  at  some  time  in  the  future  we  shall 
come  to  think  of  all  social  debtors,  except  those 


8  ECONOMICS 

who  are  disabled,  in  much  the  same  way  as  un- 
developed, untrained  members  of  society,  who 
can  be^  transformed  into  active  members  by  some 
suitable  course  of  instruction  and  discipline. 
Farm  colonies  for  tramps,  indeterminate  sen- 
iXy  tence  in  prisons,  military  and  naval  service, 
maintained  in  some  countries  on  a  large  scale 
partly  for  its  educational  value,  and  the  many 
attempts  to  restore  individual  families  to  self- 
support  by  means  of  the  personal  influence  of 
friendly  visitors,  all  rest  upon  this  idea.  Such 
agencies  as  these  counteract  to  some  extent  the 
downward  tendencies  caused  by  "  hard  times," 
overwork,  unhealthful  sanitary  conditions,  in- 
temperance and  immorality,  which  every  year 
in  every  country  leave  by  the  wayside  thou- 
sands who  have  had  the  capacity  for  work. 

Without  attempting,  therefore,  to  fix  the 
moral  responsibility  for  the  difference  between 
those  whom  we  call  economic  men  and  the  so- 
cial debtors,  or  to  find  out  at  present  why  there 
are  so  many  in  the  latter  class,  it  is  sufficient  to 
point  out  the  distinction  and  to  warn  the  student 
that  nearly  all  economic  discussion  refers  to  the 
first  class,  which  is  fortunately,  also,  by  far  the 
most  numerous. 


THE  ECONOMIC  MAN  9 

The  laws  of  value,  of  wages,  of  profits,  of  in- 
terest, of  rent,  of  money,  of  credit,  of  consump- 
tion, of  social  progress,  are  laws  operating  in  a 
society  of  equals.^  The  unit  of  all  calculations 
is  the  economic  man  with  clearly  defined  wants, 
with  personal  capacity  for  some  kind  of  useful 
work,  with  the  power  of  choosing  between  higher 
and  lower  pleasures,  between  the  satisfaction 
enjoyed  to-day  and  that  insured  for  a  future  pe- 
riod, and  with  a  social  nature  enabling  him  to 
work  in  some  degree  of  harmony  with  other 
men.  It  must  be  admitted  that  every  true  eco- 
nomic principle  would  remain  true  when  applied 
to  a  single  man  in  the  midst  of  a  desert,  or  to  a 
society  of  dependents  all  living,  without  any 
effort  or  responsibility  of  their  own,  on  the 
direct  bounty  of  some  outside  power.  But  the 
principles  would  then  be  applied  very  differ- 
ently. Their  relative  importance  would  be  al- 
tered ;  and  the  practical  conclusions  to  be  drawn 
from  them  might  be  completely  reversed.  Thus 
in  a  society  composed  entirely  of  dependents  the 
desire  for  food  and  for  shelter  might  remain 

1  This  word  is  of  course  used  in  a  relative  sense.  Economic 
men  are  equals  in  that  all  earn  their  living. 


10  ECONOMICS 

among  men  as  at  present,  but  if  the  outside 
power  gave  shelter  freely  and  food  sparingly, 
the  relative  value  of  these  two  classes  of  goods 
would  be  influenced  by  this  fact  just  as  at  pres- 
ent it  is  influenced  by  the  relative  cost  of  secur- 
ing them.^ 

No  student  of  economics  could  entirely  for- 
get, even  if  he  desired  to  do  so,  the  social 
conditions  in  the  midst  of  which  he  finds  the 
economic  laws  to  be  in  operation.  It  is  natural 
to  keep  those  actual  conditions  constantly  in 
view,  whether  practical  conclusions  are  drawn 
and  practical  applications  made  or  not.  Eco- 
nomic men  constitute  society.  On  the  outer 
fringe  of  the  society  to  be  studied  is  the  social 
dependent.  He  cannot  be  ignored.  He  is  not 
to  be  explained  by  exactly  the  same  principles  as 
apply  to  society  in  general.  The  social  debtor 
may  be  cast  aside  to  perish,  or  tolerated  as  a 
persistent  drain  on  the  social  income.  Neither 
course  is  wise,  though  human  society  is  con- 
stantly alternating  between  them. ' 

Leaving  aside  this  problem  of  practical  philan- 
thropy, we  return  to  our  society  of  economic 

1  See  p.  85,  Chapter  V. 


THE  ECONOMIC  MAN  II 

equals  to  consider  what  mental  traits  may  be 
discovered  which  are  as  universal  as  the  physi- 
cal characteristics  already  pointed  out.  Fore- 
most among  these  is  the  feeling  of  personal 
independence,  of  confidence  in  the  ability  to  earn 
one's  living,  a  sense  of  security  on  the  part  of 
the  individual  in  the  continued  public  apprecia- 
tion of  the  services  which  he  can  render.  Where 
this  confidence  is  lacking,  the  man  is  not  con- 
scious of  full  economic  freedom.  Where  it  is 
robust  and  universally  shared,  the  economic 
ideal  is  realized.  The  possession  of  property  no 
doubt  strengthens  this  sense  of  security,  but  its 
real  basis  is  personal,  and  it  is  to  a  large  extent 
independent  of  any  present  possessions  other 
than  physical  health,  mental  vigor,  and  a  free 
opportunity  to  use  one's  powers  to  the  best 
advantage. 

Coupled  with  this  feeling  of  personal  indepen- 
dence there  is,  in  the  normal  economic  man,  an 
unwillingness  to  take  for  personal  use  any 
wealth  which  he  has  not  earned.  He  would  not 
steal  even  if  the  laws  did  not  prohibit  it.  He  will 
refuse  to  accept  presents  except  as  courtesies 
which  will  in  some  way  be  reciprocated.     He 


12  ECONOMICS 

will  accept  the  highest  possible  reward  for  his 
own  labor,  because  that  is  the  law  of  his  society, 
and  he  willingly  sees  others  exact  similar  terms 
of  exchange ;  but  if  he  were  to  find  himself  in 
position  to  pocket  the  wealth  belonging  to  others, 
he  would  reject  the  opportunity,  insisting  upon 
such  social  rearrangements  as  would  restore 
the  wealth  to  its  rightful  owners.  If  the  facts 
of  actual  life  appear  to  be  in  conflict  with  this 
broad  principle,  it  is  partly  because  individuals 
are  sometimes  brought  into  possession  of  prop- 
erty as  the.  result  of  complicated  legal  and  so- 
cial relations  which  they  do  not  fully  understand, 
so  that  they  do  not  appreciate  to  what  extent 
they  have  really  become  dependents,  or  social 
debtors,  and  remain  under  the  delusion  that 
they  have  in  some  way  earned  and  are  entitled 
to  all  that  they  have ;  and  partly  because  there 
are  many  persons  who  having  such  opportuni- 
ties eagerly  seize  them  from  what  is  at  bottom 
a  criminal  instinct.  They  thus  belong  in  the 
criminal  class  of  social  debtors.  The  laws  even 
of  civilized  countries  are  imperfect,  and  do  not 
reach  all  wilful  offenders  ;  but  they  are  steadily 
improving,  and  in  no  direction  at  the  present 


THE  ECONOMIC  MAN  1 3 

time  more  rapidly  than  in  their  extension  to  the 
class  who,  having  large  income,  attempt  to  es- 
cape a  just  accounting  for  its  origin.  The  rea- 
son for  this  improvement  is  not  a  class  feeling 
of  envy  or  resentment,  but  the  fact  that  the 
great  body  of  citizens,  rich  and  poor,  deliber- 
ately act  upon  principles  of  equity,  and  sternly 
insist  that  those  who  refuse  to  recognize  those 
principles  shall  be  put  where  they  belong,  be- 
yond the  pale  of  honest  citizenship. 

Another  mental  trait  of  the  economic  man  is 
his  readiness  to  accept  the  final  judgment  of  the 
community  as  to  the  market  value  of  the  com- 
modities and  services  which  he  wishes  to  buy  or 
sell.  He  may  use  great  ingenuity  and  skill  in 
the  attempt  to  make  that  judgment  more  favor- 
able to  himself  and  to  those  whose  interests  are 
identical  with  his  own,  but  he  accepts  it  never- 
theless as  the  basis  of  his  economic  relations 
with  his  fellows.  The  line  between  the  eco- 
nomic man  and  the  social  debtor  is  nowhere 
more  clearly  drawn  than  here.  The  latter  may 
be  given  an  income  determined  by  his  human 
needs,  or  by  the  public  safety,  or  by  the  gener- 
osity of  those  who  deal  with   him,   or  by  the 


14  ECONOMICS 

amount  of  the  free  surplus  at  the  disposal  of 
society.  Any  of  these  methods  of  distribution 
involves  inquiry  into  the  personal  affairs  of  the 
recipients,  such  as  would  be  resented  by  the 
normal  economic  man.  Such  inquiry  would  be 
humiliating  to  one  who  is  not  in  need  of  assist- 
ance. It  may  or  may  not  be  humiliating  to  a 
dependent  according  as  the  dependency  is,  or  is 
not,  caused  by  his  own  fault. 

Economic  society  might  conceivably  adopt 
some  other  basis  of  wealth  distribution  such  as 
that  proposed  by  the  socialists  or  the  commun- 
ists. But  present  opinion  in  all  countries,  and, 
as  far  as  all  history  shows,  the  practically  uni- 
versal opinion  of  the  past,  has  been  in  favor 
of  a  general  market  value  for  each  class  of 
goods,  nicely  adjusted  to  the  total  quantity  of 
such  goods  available,  and  to  the  demand  or 
general  desire  for  them.  Attention  will  be  given 
in  due  time  to  the  exact  nature  and  laws  of 
value.  At  present  it  is  only  necessary  to  point 
out  the  universal  acquiescence  in  the  fact  of 
value  as  a  characteristic  of  that  part  of  the 
human  family  with  which  we  are  directly  con- 
cerned.    Those  who  struggle  for  higher  wages, 


THE   ECONOMIC  MAN  1 5 

no  less  than  others  who  attempt  to  sell  land  or 
diamonds  at  the  highest  possible  price ;  advo- 
cates of  a  single  gold  standard,  no  less  than 
bimetalists  who  would  like  to  see  the  price  of 
silver  increased ;  scholars  who  prize  books  and 
instruments  of  research,  and  an  opportunity  for 
travel,  and  free  time  for  meditation  and  study ; 
parents  who  weigh  carefully  the  cost  of  pro- 
posed courses  of  education  for  their  children ; 
every  one  who  has  any  kind  of  unsatisfied  desire 
takes  value  into  consideration. 

The  economic  man  has  many  other  character- 
istics less  easily  described,  but  these  are  funda- 
mental, are  easily  recognized,  and  will  remain  as 
a  part  of  our  conception,  however  extensive  may 
become  our  acquaintance  with  his  less  obvious 
traits.  It  has  already  become  obvious  that  the 
economic  man  is  not  a  mere  abstraction  and 
that  he  is  not  a  rare  exception.  He  is  not  only 
a  human  being.  He  is  the  normal  human  being 
of  ordinary  life.  To  an  increasing  extent  we 
are  all  becoming  economic  men. 


CHAPTER   II 

THE   ECONOMIC   ENVIRONMENT 

Like  geography  and  some  other  sciences, 
economics  requires  a  knowledge  of  man's  sur- 
roundings. Those  surroundings  are  partly 
physical  and  partly  social.  What  economics 
demands  of  physical  science  is  a  knowledge 
of  the  particular  facts  concerning  the  surface 
of  the  earth  and  the  atmosphere  which  have 
any  direct  bearing  upon  man's  welfare.  If  it 
were  our  task  to  account  for  those  facts,  it  would 
be  necessary  to  bring  into  our  study  all  the 
teachings  of  astronomy  concerning  the  past  and 
present  of  the  solar  system,  all  the  teachings  of 
geology  concerning  the  formation  of  the  crust 
of  the  earth,  and  the  teachings  of  biology  con- 
cerning the  natural  history  of  plants  and  ani- 
mals. If,  on  the  other  hand,  we  were  to 
attempt  an  examination  of  all  those  branches 
of  human  knowledge  which  indirectly  contrib- 
ute to  the  welfare  of  man  by  furnishing  to 
i6 


THE  ECONOMIC  ENVIRONMENT  1/ 

mechanic,  farmer,  or  physician,  the  necessary 
equipment  of  his  calling,  we  should  speedily 
get  beyond  the  proper  boundaries  of  any  sin- 
gle science.  Our  inquiry  is  much  less  exten- 
sive and  may  be  stated  in  this  way :  Of  what 
general  conditions  must  account  be  taken  in 
man's  struggle  with  nature  for  a  living?  Or, 
in  other  words,  what  are  the  facts  which  de- 
termine the  character  of  his  economic  life  ? 

It  is  evident  that  we  cannot  borrow  indis- 
criminately from  geography,  geology,  or  other 
sciences.  There  are  innumerable  facts  which 
are  essential  to  a  well-ordered  description  of 
the  earth's  surface  which  are  not  essential  in 
a  statement  of  man's  economic  surroundings, 
because  they  have  a  very  remote  bearing,  if 
any,  upon  the  welfare  of  society.  Such,  for 
example,  are  the  descriptions  of  many  of  the 
natural  wonders  of  the  Arctic  regions  and  of 
the  luxuriant  vegetation  of  tropical  swamps. 
The  increase  of  knowledge  or  a  shifting  of 
conditions,  such  as  the  discovery  of  gold  in  the 
Klondike,  or  the  transfer  of  tropical  islands 
to  a  more  efficient  government,  occasionally 
increases  the  relative  importance  of  such  facts, 


1 8  ECONOMICS 

giving  them  a  new  significance.  By  such  means 
the  environment,  to  adopt  a  more  appropriate 
term  for  all  these  surroundings  which  have  an  in- 
fluence upon  man's  welfare,  is  continually  chang- 
ing, certain  conditions  which  were  once  of  conse- 
quence ceasing  to  be  so,  and  others  rising  to  a 
prominent  place.  But  the  environment,  as  we 
shall  use  the  term,  never  includes  more  than  a 
comparatively  small  fragment  of  the  universe,  or, 
for  that  matter,  more  than  a  small  portion  of  the 
facts  and  relations  to  be  found  on  our  own  globe. 
In  searching  for  those  conditions  of  physi- 
cal nature  which  are  the  primary  requisites  of 
human  activity,  we  encounter,  first,  what  seems 
to  be  fundamental  and  universal,  the  existence 
of  physical  energy.  The  forces  of  nature  are 
to  a  large  extent  placed  under  man's  will.  If 
this  were  not  the  case,  man  would  not  be  able 
to  exert  any  influence  over  his  own  well-being, 
and  there  would  be  no  occasion  for  the  study 
of  economic  laws.  This  physical  energy  ap- 
pears in  various  forms,  as  heat,  light,  magnet- 
ism, gravitation,  and  muscular  force.  In  any 
of  its  forms  it  is  convertible  into  others.  In 
this  process,  if   intelligently  directed,  it  trans- 


THE  ECONOMIC  ENVIRONMENT  19 

forms  useless  matter  into  useful  goods,  and  thus 
contributes  to  the  end  of  all  economic  ac- 
tivity. 

Physical  energy  is  often  totally  misdirected 
with  the  effect  that  goods  which  might  have 
been  of  use  to  men  are  destroyed,  i.e.,  given 
a  form  which  renders  them  unfit  for  the  use 
to  which  they  would  have  been  put.  Perhaps 
it  is  never  so  directed  as  to  be  fully  utilized. 
All  human  progress  may  be  looked  upon  as 
an  increase  in  the  economy  of  physical  energy. 
The  new  machine  which  utilizes  a  larger  pro- 
portion of  the  force  released  by  the  burning 
of  coal  or  the  falling  of  water  thus  becomes 
a  type  of  the  progress  of  society. 

The  student  of  physics  learns  that  whether 
man  succeeds  or  fails  in  his  attempt  to  utilize 
a  particular  form  of  energy  for  his  own  pur- 
poses, the  energy  itself  is  not  lost.  The  physi- 
cist measures  it,  in  its  earlier  and  later  forms, 
and  finds  that  none  has  been  destroyed.  But 
such  measurements  do  not  concern  the  econ- 
omist. The  success  or  failure  to  utilize  the 
energy  in  the  particular  form  in  which  it  was 
embodied  is,  from    his    standpoint,  a  final  fail- 


20  ECONOMICS 

ure  or  success.  If  the  coal  in  the  engine  does 
not  drive  the  wheels  successfully,  it  is  of  little 
consequence  that  the  temperature  of  the  sur- 
rounding air  is  slightly  raised,  and  that  gases 
are  produced  by  the  combustion.  Infinite 
knowledge  would  be  necessary  for  a  complete 
utilization  of  the  available  natural  forces.  The 
amount  of  knowledge  which  we  do  possess  is 
the  slow  product  of  experiment  and  research. 
Years  may  be  spent  upon  the  simplifying  of 
processes  of  which  we  are  already  in  posses- 
sion. Hence  the  saying  among  machinists  that 
anybody  can  make  a  machine  to  do  a  given 
kind  of  work,  but  only  a  genius  can  make  a 
simple  machine  that  will  do  the  work  cheaply 
and  well. 

A  few  of  the  forms  in  which  physical  energy 
appears  are  of  sufficient  importance  to  justify  a 
fuller  examination  of  their  relation  to  human 
welfare. 

Heat  may  be  regarded  as  the  primary  requi- 
site of  plant  and  animal  life.  Not  only  is  heat 
an  absolute  condition  of  such  animal  and  vege- 
table life  as  we  know,  but  it  would  seem  to  be 
essential  that  we  receive  almost  precisely  that 


THE   ECONOMIC   ENVIRONMENT  21 

amount  of  it  which  we  do  receive.^  A  few  de- 
grees in  excess  of  highest  summer  heat  would 
destroy  vegetation  over  a  large  part  of  the  earth, 
and  a  few  degrees  less  than  our  winter  tempera- 
ture would  render  a  still  larger  part  uninhabi- 
table. The  sun's  heat  is  used  directly  in  count- 
less processes  of  agriculture  and  manufacture ; 
it  is  an  element  in  the  formation  of  winds  and 
ocean  currents ;  and  by  raising  water  from  the 
oceans  in  the  form  of  vapor  it  permits  the  circu- 
lation through  the  continents.  Stored  up  in 
beds  of  coal  it  becomes  one  of  the  most  highly 
prized  agents  of  industry,  and  again,  in  its  more 
direct  form,  it  is  the  source  not  only  of  that 
high  degree  of  physical  vigor  which  is  essential 
to  human  enjoyment,  but  of  life  itself. 

Light,  like  heat,  is  indispensable,  and  as  in 
the  case  of  heat,  the  chief  supply  of  our  globe 
is  from  the  sun.  We  may,  perhaps,  conceive  a 
society  existing  without  light,  but  its  activity 
would  be  very  different  from  our  own.  Almost 
the  whole  of  our  work  presupposes  sight  on  the 
part  of  those  who  direct  and  perform  it.  With- 
out light,  dangers  to  life  would  be  multiplied, 

1  Shaler,  Interpretation  of  Nature,  p.  66. 


22  ECONOMICS 

and  countless  sources  of  enjoyment  would  be 
destroyed.  The  dependence  of  human  welfare 
upon  the  continued  presence  of  a  certain  amount 
of  energy  in  the  form  of  light  is  therefore  obvi- 
ous. But  it  would  be  difficult  to  obtain  a  full 
measure  of  its  contribution  to  our  economic  life. 
Color  is  as  important  in  industry  as  in  art,  and 
both  art  and  industry  fall  within  the  field  of 
economics  in  so  far  as  they  contribute  to  human 
welfare.  A  faint  illustration  of  the  extent  to 
which  light  enters  into  the  environment  may  be 
found  in  the  economy  of  time  and  labor  result- 
ing from  the  use  of  books  and  newspapers. 

Gravitation  is  a  third  form  of  energy  which 
demands  special  attention.  No  force  is  more 
familiar  in  the  mechanical  processes  of  every- 
day life,  and  it  is  all-pervasive.  We  rely  upon 
it  for  the  weight  of  the  hammer,  for  the  flow  of 
water,  and  for  the  stability  of  objects  when 
placed  in  position.  Gravitation  holds  ships  and 
railway  trains  in  their  courses.  It  draws  the 
ripened  seed  and  the  withered  leaf  to  the 
ground,  and  causes  the  circulation  of  air  and  of 
water  for  which  preparation  has  been  made  by 
the  action  of  heat.     Because  of  its  very  familiar- 


THE   ECONOMIC   ENVIRONMENT  23 

ity  it  is  easy  to  underestimate  the  important  part 
which  this  silent  force  plays  in  the  life  of  man. 

Among  the  various  forms  of  physical  energy, 
muscular  force,  and  especially  that  exerted  by 
human  beings,  has  usually  been  assigned  an 
unique  place  in  economic  texts.  For  certain 
branches  of  our  discussion  it  will  be  of  advan- 
tage to  distinguish,  in  the  total  energy  expended 
in  any  given  industrial  activity,  that  part  which 
may  be  attributed  to  man's  labor;  but  for  our 
present  purpose  it  will  be  simpler  and  entirely 
accurate  to  regard  muscular  force  as  one  among 
many  forms  of  energy,  all  of  which,  like  muscu- 
lar force,  even  if  not  in  the  same  degree,  are 
under  human  direction.  Muscular  force  may 
be  regarded  as  the  highest  form  of  physical 
energy,  for  the  reason  that  the  relation  between 
the  directive  will  and  the  energy  to  be  controlled 
is  here  most  immediate.  It  is  not  necessary  to 
invent  intermediate  mechanism  or  device,  or 
even,  in  many  of  the  muscular  processes,  to 
make  conscious  calculation  of  means  and 
methods.  Action  follows  will  with  incredible 
swiftness.  The  natural  force  which  has  been 
generated  in  muscular  tissue  is  nevertheless  a 


24  ECONOMICS 

product  of  other  forces.  It  has  a  natural  origin 
in  the  food  by  which  man  is  nourished,  the  heat 
and  Hght,  and  the  biologic  forces  upon  which 
his  existence  and  health  depend. 

The  forces  of  nature,  some  examples  of 
which  have  now  been  given,  are  capable  of 
acting  only  upon  matter.  The  transformation 
from  one  sort  of  energy  to  another  takes  place 
by  the  process  of  moving  material  objects. 
It  is  a  commonplace  of  economics  that  man's 
part  in  industry  is  confined  to  the  moving  of 
things,  but  it  is  also  in  this  manner  that  all 
physical  forces  act.  Heat  and  gravitation  cause 
the  formation  of  clouds,  the  fall  of  rain,  and 
the  flow  of  rivers.  It  is  everywhere  the 
moving  of  solid,  fluid,  or  vaporous  matter. 
There  is  likewise  no  other  manner  in  which 
directive  intelligence  may  assert  its  will.  By  a 
series  of  motions,  ores  are  mined,  goods  ex- 
changed, and  nutritious  food  transformed  into 
bodily  tissue.  These  motions  are  largely  within 
the  scope  of  familiar  observation.  By  a  series 
of  motions  somewhat  farther  removed,  moun- 
tain ranges  were  thrown  up,  glaciers  carried 
across   the   face   of  the   continents,  soils  made 


THE   ECONOMIC   ENVIRONMENT  2$ 

from  disintegrating  rocks,  and  animal  and  plant 
forms  adapted  to  the  various  regions  of  the 
earth. 

Since  the  physical  forces  upon  which  man  is 
to  rely  act  only  upon  matter,  it  becomes  neces- 
sary to  consider  the  appearance  of  the  mate- 
rial world  in  and  upon  which  they  are  to  act. 
Of  the  earth's  interior  little  is  known,  and  even 
that  little  we  may  omit.  Undoubtedly  the  inte- 
rior is  subject  to  the  action  of  physical  energy, 
and  any  radical  changes  in  its  condition  might 
well  be  fatal  to  the  existence  of  human  society. 
Assuming  its  stability,  however,  we  must  re- 
gard all  speculations  concerning  its  condition  as 
beyond  our  present  field  of  study.  We  need 
consider  only  the  earth's  surface,  including 
everything  that  is  so  near  the  surface  as  to  be 
within  reach  of  the  miner  and  the  dredger,  and 
also  including  the  atmosphere.  The  physical 
forces  act  uniformly  wherever  they  are  to  be 
found  throughout  the  world ;  but  those  elements 
of  the  environment  upon  the  examination  of 
which  we  are  now  entering  are  variously 
arranged  in  different  regions.  It  would  be 
difficult  to  find  any  two  spots  on  the  earth  in 


26  ECONOMICS 

which  the  environments  are  identical;  and  the 
primary  differences  are  geographical. 

The  natural  home  of  man  is  upon  the  land. 
The  entire  expanse  of  land  area  is  a  little  more 
than  one-fourth  of  the  earth's  surface,  or  about 
one-half  as  great  as  that  of  the  sea,  if  we  leave 
out  of  account  the  frozen  oceans  of  the  polar 
regions.  Of  this  land  area,  three-fourths  is  in 
the  northern  half  of  the  globe,  and  grouped 
into  two  great  land  masses,  known  as  the  Old 
World  and  the  New.  The  Old  World,  consist- 
ing of  two  distinct  continents,  of  which  Africa 
is  one,  and  Europe  and  Asia  the  other,  is  more 
than  twice  as  large  as  the  New  World  of  North 
and  South  America.  Australia  alone  is  entirely 
within  the  Southern  Hemisphere.  Asia  is  dis- 
tinguished for  her  lofty  plateaus,  Europe  for 
her  mountains  and  indented  coast-line,  America 
for  her  plains  and  river  systems.^  The  moun- 
tains of  the  Old  World  stretch  from  east  to 
west;  those  of  the  New  World,  from  north  to 
south.  The  direction  of  the  mountain  ranges 
influences  the  direction  of  river  courses,  the 
distribution   of  moisture,  the   temperature,   the 

iGuyot,  The  Earth  and  Man,  Chapters  VIII.  and  IX. 


THE   ECONOMIC  ENVIRONMENT  2/ 

character  of  the  soils  and  of  the  crops,  the 
movements  of  population,  and  the  growth  of 
industry.  It  is,  therefore,  a  consideration  of 
great  importance.  Yet,  on  the  whole,  the  posi- 
tion of  mountain  ranges  is  of  less  importance 
in  the  economic  environment  than  the  relative 
elevation  of  plains  and  plateaus,  and  the  width  of 
river  basins.  Thus  it  often  happens  that  feat- 
ures of  the  landscape  which  to  the  naturalist  or 
artist  are  most  striking,  are  of  less  interest  to 
the  student  of  human  welfare  than  others  that 
are  less  obvious.  Another  simple  illustration  of 
the  same  truth  may  be  cited  here,  although  it 
anticipates  features  of  the  enviroment  upon 
which  we  have  not  yet  touched.  Every  text- 
book of  physical  geography  dwells  upon  the 
difference  between  the  trees  of  different  regions. 
No  traveller  can  avoid  noticing  such  differences, 
and  they  really  are  of  some  economic  signifi- 
cance. But  they  are  of  far  less  importance 
than  differences  in  the  grasses.  All  the  cereals, 
or  grains,  are  cultivated  grasses,  and  both  the 
vegetable  and  animal  food  of  man  are  conse- 
quently determined  in  large  part  by  their 
character. 


28  ECONOMICS 

Of  almost  equal  importance  with  the  ele- 
ments already  noticed  are  climate,  soil,  mineral 
and  vegetable  products,  and  facilities  for  com- 
munication. A  writer  describes  the  provinces 
which  border  on  the  basin  of  the  Mediterranean 
Sea  as  enjoying  —  in  healthfulness  and  equa- 
bility of  climate,  in  fertility  of  soil,  in  variety  of 
vegetable  and  mineral  products,  and  in  natural 
facilities  for  the  transportation  and  distribu- 
tion of  exchangeable  commodities  —  advantages 
which  have  not  been  possessed  in  any  equal 
degree  by  any  other  territory  of  like  extent  in 
the  Old  World  or  the  New.^  The  Roman  Em- 
pire, which  encircled  the  Mediterranean  and 
extended  its  sway  far  into  three  continents, 
thus  rested  upon  the  finest  physical  basis  ever 
possessed  by  any  single  political  power.  If, 
then,  we  analyze  the  terms  in  which  this  supe- 
rior physical  environment  has  been  described, 
we  shall  be  in  possession  of  nearly  all  the  re- 
maining features  of  the  environment  that  need 
statement. 

By  the  climate   is   meant  the    character   of 

^  George  P.  Marsh,  The  Earth  as  Modified  by  Human  Action^ 
p.  I. 


THE  ECONOMIC  ENVIRONMENT  29 

the  atmosphere  as  regards  temperature  and 
moisture.  Climate  is  affected  by  altitude,  dis- 
tance from  the  equator,  proximity  to  the  sea, 
oceanic  and  atmospheric  currents,  the  presence 
of  great  forests,  and  the  situation  with  refer- 
ence to  mountain  ranges,  plateaus,  and  plains. 
The  equatorial  regions  are  hot  and  moist. 
Islands  and  lands  bordering  upon  the  sea  have 
a  more  equable  climate,  milder  in  winter  and 
cooler  in  summer,  than  lands  of  equal  latitude 
situated  far  inland.  Since  land  absorbs  and 
gives  off  heat  more  rapidly  than  water,  there 
is  an  unequal  heating  of  the  air  which  causes 
an  alternation  of  land  and  sea  breezes  daily, 
and  a  similar  movement  on  a  larger  scale  in 
consequence  of  the  changes  of  seasons.^  These 
larger  currents  are  of  great  economic  signifi- 
cance. They  raise  or  lower  the  temperature 
according  as  they  come  direct  from  the  sea 
or  from  continental  areas.  They  bring  with 
them  moisture  or  drought.  They  have  been 
known  to  carry  fine  particles  of  soil,  as  dust, 
in  sufficient  quantities  to  alter  materially  the 
character  of  the  soil  upon  which  it  is  deposited. 

1  See  any  standard  Physical  Geography. 


30  ECONOMICS 

Clouds,  whether  brought  by  these  currents 
of  air  or  formed  nearer  at  hand,  modify  the 
climate  by  screening  the  earth  from  the  direct 
rays  of  the  sun,  and  by  preventing  rapid  radia- 
tion of  the  heat  when  the  direct  rays  are  with- 
drawn. 

Ocean  currents  affect  the  climate  of  the 
regions  near  which  they  flow,  causing,  for 
example,  the  difference  between  the  tempera- 
ture of  France  and  that  of  Labrador  in  equal 
latitudes,  and  giving  to  the  British  Islands 
and  Norway,  to  Japan  and  Alaska,  a  much 
warmer  and  moister  climate  than  is  ordinarily 
to  be  found  in  lands  so  far  from  the  equator. 
The  oceanic  currents  arise  from  the  unequal 
heating  of  water,  as  those  of  the  atmosphere 
arise  from  the  unequal  heating  of  air.  Among 
the  minor  but  still  important  regulators  of 
climate  is  the  presence  of  forests  and  other 
vegetation.  A  very  great  quantity  of  water 
is  given  to  the  air  by  the  leaves  of  trees  and 
grasses,  and  the  moisture  of  the  climate  is 
thus   increased,^   while   the   temperature   is    at 

1  Gaye,  The  Great  World's  Farm,  Chapter  IX. 


THE  ECONOMIC  ENVIRONMENT  31 

the   same   time   lowered   by   the   using   up   of 
the  heat  in  the  process  of  evaporation. 

The  agencies  that  unite  to  produce  climate 
are  interwoven  in  such  various  ways  that  lines 
connecting  places  of  equal  temperature  ^  are  by 
no  means  parallel  with  the  earth's  equator.  The 
extremes  of  temperature  are  crowded  together 
much  more  closely  in  the  Old  World  than  in  the 
New.  In  some  parts  of  the  Eastern  Hemisphere 
differences  are  met  with  in  a  day's  journey 
which  are  as  great  as  those  that  the  traveller 
would  experience  in  going  from  Alaska  to 
Mexico.  In  North  America  the  general  in- 
crease in  elevation  toward  the  south  partly  off- 
sets the  effect  of  the  more  vertical  rays  of  the 
sun  in  the  equatorial  zone,  thus  accounting  for 
the  slower  increase  in  temperature.  When  we 
say  of  a  particular  place  in  the  temperate  zone 
that  it  has  a  fine  climate,  we  mean  that  it  has  a 
fair  proportion  of  days  in  which  there  is  bright 
sunshine ;  that  its  summer  temperature  is  neither 
so  high  as  to  kill  vegetation  and  to  render  the 
life  of  man  insupportable,  nor  so  low  as  to  pre- 

1  These  lines  are  called  isotherms.  They  are  shown  upon 
the  maps  issued  by  the  weather  bureau. 


32  ECONOMICS 

vent  the  ripening  of  grains  and  fruit ;  that  there 
is  a  liberal  supply  of  moisture,  sufficiently  dis- 
tributed throughout  the  year  to  avoid  the  dan- 
gers of  drought  and  flood ;  that  violent  storms 
do  not  occur,  or  are  infrequent;  that  there  is 
sufficient  moisture  in  the  atmosphere  in  the 
form  of  clouds  to  serve  as  a  screen  from  undue 
heat  and  cold,  but  not  so  much  humidity  as  to 
increase  the  discomfort  of  summer  ;  and,  finally, 
that  the  atmosphere  is  not  contaminated  by  foul 
vapors  and  disease  germs. 

Such  a  climate  will  be  conducive  to  health 
and  vigor,  and  if  other  conditions  are  equally 
favorable,  it  will  give  ample  rewards  for  labor 
spent  upon  the  cultivation  of  vegetable  life.  Its 
natural  vegetation  may  be  less  luxuriant,  but 
the  conditions  of  economic  life  are  on  the  whole 
more  favorable  than  in  the  hotter  and  moister 
climate  of  a  tropical  zone.  It  is  not  at  all  es- 
sential that  all  of  the  conditions  enumerated 
should  be  present  in  order  to  constitute  a  desir- 
able economic  environment.  Man  may  succeed 
in  his  struggle  for  a  living  even  where  the  cli- 
mate is  not  equable,  where  the  summers  are  in- 
tensely hot  and  the  winters  bitterly  cold,  where 


THE   ECONOMIC   ENVIRONMENT  33 

the  winds  bring  little  moisture  and  there  are  no 
rains  for  months  in  succession.  This  is  only  to 
say  that  climate  is  but  one  element  in  the  ma- 
terial environment,  and  that  we  must  consider 
also  its  other  features. 

Among  these  none  is  of  greater  significance 
than  the  soil.  In  the  present  chapter  it  is  the 
origin  and  composition  of  soils  with  which  we 
are  concerned.  In  a  future  chapter,  on  the 
making  of  goods,  it  will  be  pointed  out  that 
soils  can  be  modified  in  character,  and  their  use- 
ful qualities  renewed  as  they  are  worn  out. 
Soil  consists  mainly  of  clay,  sand,  and  vegetable 
mould  ;  or  of  a  mixture  from  which  one  or  more 
of  these  elements  may  be  absent.  A  large 
number  of  other  ingredients,  such  as  iron,  lime, 
and  potash,  although  present  in  comparatively 
small  quantities,  are  important  because  they  are 
the  very  elements  ^  that  enter  into  the  composi- 
tion of  plants.  Clay  is  formed  by  the  decompo- 
sition of  feldspar,  a  mineral  which  also  contains 
the  chemical  ingredients  of  potash  and  other 
valuable  plant  foods.  Sand  is  the  result  of  the 
decomposition    of   rock    comparatively  poor  in 

1  The  word  is  not  here  used  in  a  chemical  sense. 
D 


34  ECONOMICS 

such  elements. 1  Both  of  the  two  chief  constitu- 
ents of  the  soil  thus  have  their  origin  in  the 
breaking  up  of  solid  rock.  The  chief  agents 
by  which  nature  accomplishes  the  immense 
task  of  grinding  huge  masses  of  rock  into  sand 
and  clay  are  water,  the  atmosphere,  and  the 
roots  of  plants. 

Oxygen  unites  with  iron  to  rust  it,  and  carbon 
dioxide  with  lime,  potash,  and  other  substances, 
to  form  bicarbonates.  Water  aids  in  the  crum- 
bling process  in  two  ways.  It  dissolves  the  cem- 
ent which  had  held  together  the  particles  of 
the  rock,  performing  this  work  with  especial 
ease  where  it  has  taken  up  certain  gases  from 
the  air,  or  in  its  passage  through  the  earth.  It 
enters  the  crevices  of  the  rocks,  and  in  freezing 
expands  with  irresistible  force,  breaking  up  any 
rocks  into  which  it  can  gain  entrance  in  frosty 
weather.  Water  aids  in  chemical  decomposition 
by  carrying  the  chemical  agents  of  the  air  to 
places  where  the  atmosphere  does  not  otherwise 
circulate.  Moreover,  on  exposed  surfaces,  moist- 

1  Most  of  the  igneous  rocks,  such  as  granite  and  gneiss,  contain 
both  free  quartz  and  feldspar,  and  their  decomposition  produces 
both  sand  and  clay. 


THE  ECONOMIC  ENVIRONMENT                35  ' 

I 

ure  is  a  strong  ally  of  oxygen  and  the  other  de-  ; 

structive  agents.     Vegetable  growths  cooperate  ,i 

with  water  and  the  chemical   agents   at   every  ] 

step.     The   seeds   of  tiny  lichens  attach  them-Wvo^"^ 

selves  to  the  apparently  smooth  surface  of  lava, 

quartz,  or  other  unbroken  rocks.     The  acid  of 

the  roots  enables  them  to  eat  into  the  rock  until  \ 

it  is  roughened,  and  the  rootlets  themselves  are  ; 

able  to  find  their  way  into  the  openings.     Later 

the   effects   of   growing    plants    become   more 

obvious.     Roots    swollen   by   moisture   and   in  ; 

growth  force  apart  pieces  of  rock  which  have  j 

first  been  separated  by  water  or  the  corroding  ] 

gases.     The  plants  keep  moist  the  rocks  upon  :. 

or  near  which  they  grow,  and  their  leaves  give  ] 

off  a  continual  supply  of  oxygen,  which,  in  turn, 

acts   upon   the   surrounding   rocks.     All   these  i 

processes  go  on  quietly  but  constantly.     They  ■ 

have  not  only  created  the   soil   which  we  now  | 

possess,   but  they  are  continually  contributing  i 

new  soil  to  take   the  place   of   that   which   is  | 

washed  into  the  ocean.  1 

Water   as  we  have  seen    is  one  of  the  most  j 

active  agents  in  the  making  of  soil,  but  its  ser-  ] 

vice  does  not  end  there.     Few  rocks  would  of  = 


36  ECONOMICS 

themselves  yield  a  serviceable  soil.  In  order 
that  it  may  accomplish  its  purpose  of  furnishing 
the  necessary  conditions  of  plant  growth,  the 
decomposed  rock  must  be  thoroughly  mixed. 
This  again  requires  that  parts  of  the  soil  should 
be  carried  long  distances.  Water  is  the  great 
carrier  and  mixer  of  soils.  Every  mountain 
torrent  brings  down  sand,  mud,  and  silt  from 
the  weathered  rocks  of  the  mountains.  In 
times  of  flood,  when  rivers  are  swollen  beyond 
their  banks,  and  the  water  sweeps  over  places 
not  washed  by  the  ordinary  streams,  tons  of  soil 
are  carried  down  to  the  valleys  and  mingled  with 
soils  which  had  been  brought  by  other  tribu- 
taries of  the  same  river.  Soil  is  brought  from 
the  hillsides  and  mountain  tops  where  it  could 
not  be  utilized,  to  the  more  level  valleys  where 
cultivation  is  possible.  Changes  in  the  beds  of 
rivers,  and  inundations  occasioned  by  heavy 
rains,  or  by  such  causes  as  the  dams  of  beavers, 
spread  the  soil  over  wide  areas. 

Glaciers  are  also  efficient  carriers  and  pulver- 
izers. The  rocks  over  which  they  pass,  and 
which  they  carry  at  their  sides  and  on  their 
under   surfaces,    are   reduced   to   soil   and   are 


THE   ECONOMIC   ENVIRONMENT  37 

washed  into  the  valleys  when  the  glacier  is 
finally  transformed  at  the  melting  line  into  a 
muddy  river.^  Wind,  to  some  extent,  carries 
sand  and  dust,  and  so  aids  in  the  grand  process 
of  soil  mixture  which  is  finally  completed  by 
plants  and  earthworms  and  by  the  conscious 
efforts  of  man. 

There  is  one  element  of  the  soil  which,  as  its 
name  indicates,  does  not  come  directly  from  the 
disintegration  of  rocks.  This  is  the  vegetable 
mould  or  humus.  It  is  not,  as  was  formerly 
supposed,  the  chief  source  of  fertility,  but  it  is 
nevertheless  an  important  constituent.  It  is 
formed  by  the  decay  of  organic  matter,  and  is 
rich  in  nitrogen,  which  plants  require  for  their 
growth,  and  which  they  are  apparently  unable 
to  take  from  the  air,  or  from  any  other  source 
so  readily  as  from  the  vegetable  mould.  No 
soil  is  naturally  fertile  unless  it  contains  a  cer- 
tain amount  of  organic  matter,  and  soils  in 
which  such  matter  is  abundant  are  quite  apt  to 
be  supplied  with  the  other  elements  of  plant 
food. 

1  It  is  an  interesting  fact  that  the  soils  of  the  states  north  of 
the  Ohio  and  Missouri  rivers  are  glacial. 


38  ECONOMICS 

Chemically,  neither  clay,  nor  sand,  nor  cal- 
cium contributes  much,  if  anything,  to  plant 
growth ;  but  they  determine  the  physical  char- 
acter of  the  soil,  and  the  productivity  of  land 
depends  quite  as  much  on  its  physical  as  on 
its  chemical  properties.  The  presence  of  clay 
tends  to  make  the  soil  moist  and  tenacious, 
obstructing  the  circulation  of  air  in  the  soil  and 
rendering  cultivation  difficult.  Sand,  on  the 
contrary,  makes  the  soil  dry,  loose,  and  easy  of 
cultivation.^ 

Only  an  extremely  small  portion  of  the  culti- 
vated soil  is  actually  made  use  of  as  plant  food. 
From  soil  of  which  one  foot  in  depth  will  weigh 
three  to  four  million  pounds  to  the  acre,  an 
ordinary  crop  will  take  of  plant  food  about  two 
hundred  pounds.^  On  the  other  hand,  the  por- 
tion thus  utilized  constitutes  only  about  one  per 
cent  of  the  weight  of  the  plant  itself.^  The 
rest  has  come  from  the  air.     The  principal  ele- 

1  V.  d.  Goltz  in  Schonberg's  Handbtuh,  Vol.  I.,  p.  29. 

2  American  Encyclopedia,  Art.  Agricultural  Chemistry. 

8  In  the  case  of  grass  two  per  cent.  Atwater,  "  The  Food  Sup- 
ply of  the  Future,"  in  November  (1891)  Century  Magazine.  In 
Schonberg's  Handbuch,  v.  d.  Goltz  estimates  it  at  from  two  to 
seven  per  cent. 


THE  ECONOMIC  ENVIRONMENT  39 

merits  of  the  soil  suitable  for  plant  food  are  : 
Iron,  lime,  magnesia,  silica,  sulphuric  acid, 
potash,  phosphoric  acid,  and  nitrogen.  In  un- 
cultivated lands  these  elements  are  returned  to 
the  soil  by  the  decay  of  the  plants  which  have 
taken  them.  When  the  products  of  the  soil  are 
removed,  whether  in  the  form  of  vegetables, 
fruit  and  grain,  or  in  the  form  of  animal  flesh, 
certain  of  the  elements  become  exhausted. 
Potash,  phosphorus,  and  nitrogen  are  the  ele- 
ments that  are  likely  to  disappear  in  this  man- 
ner. Methods  are  found  of  supplying  phos- 
phates and  potash  compounds,  but  the  case  of 
nitrogen  has  been  more  difficult.  Plants  do  not 
ordinarily  have  the  power  of  using  nitrogen  in 
its  pure  form,  otherwise  there  would  be  no  pos- 
sibility of  exhausting  the  abundant  supply  fur- 
nished by  the  free  nitrogen  of  the  atmosphere. 
Ammonia  and  nitric  acid,  both  a  result  of  the 
decay  of  organic  matter,  are  the  forms  best 
suited  for  plant  food.  The  former  is  a  com- 
pound of  nitrogen  with  hydrogen,  and  is  always 
present  in  small  quantities  in  the  air.  The  lat- 
ter, uniting  with  various  minerals  to  form  ni- 
trates or  mineral  salts,  furnishes  the  chief  supply 


40  ECONOMICS 

that  is  obtained  from  the  soil.^  A  special  science, 
agricultural  chemistry,  is  occupied  largely  with 
an  investigation  of  the  methods  by  which  these 
necessary  elements  may  be  supplied,  in  order 
that  the  fertility  of  soils  may  be  systematically 
restored  or  increased. 

Next  in  order  after  climate  and  soil,  belongs 
a  consideration  of  the  geographical  configura- 
tion. The  insular  position  of  England  has 
probably  been  a  more  important  factor  in 
determining  the  nature  and  development  of 
her  industry  than  either  her  soil  or  her  cli- 
mate, and  in  nearly  all  countries  the  geograph- 
ical position  has  been  of  marked  influence. 
We  have  already  referred  to  the  effects  upon 
climate  which  may  be  traced  to  elevation  and 
to  position  in  relation  to  ocean  and  mountain 
ranges.  Furthermore,  the  outline  of  the  coast, 
the  direction  of  navigable  river  courses,  the 
presence  of  mountain  passes,  and,  in  general, 
all  those  features  of  the  local  geography  which 
determine  the  difficulty  or  ease  of  communica- 
tion and  migration,  are  to  be  considered  essen- 

1  The  recent  discovery  of  the  bacteria  called  "  nitrifying  or- 
ganisms "  explains  the  method  by  which  nitrogen  is  supplied  to 
plants.     Consult  any  recent  work  on  bacteria. 


THE  ECONOMIC  ENVIRONMENT  41 

tial  features  of  the  environment  of  any  given 
region.  North  America  is  less  fortunate  than 
Europe  in  the  character  of  her  coast-line,  since 
it  is  less  indented,  furnishing  fewer  harbors 
and  bringing  a  smaller  portion  of  the  entire 
area  into  direct  contact  with  the  ocean,  the 
highway  to  other  continents.  But  this  is  fully 
compensated  by  the  extraordinary  opportunities 
provided  for  access  to  the  interior  by  the  great 
river  systems,  and  by  the  absence  of  serious 
mountain  barriers  between  the  various  parts  of 
the  continent. 

Although  the  Alleghany  Mountains  were  a 
temporary  obstacle  to  the  westward  advance 
of  the  early  colonists,  the  check  was  not  more 
than  sufficient  to  insure  that  the  Atlantic  slope 
should  be  fairly  well  occupied  before  population 
spread  westward.  Along  the  St.  Lawrence 
and  the  Ohio,  and  up  the  course  of  the  Mis- 
sissippi, explorers  and  settlers  pushed  their 
way  over  natural  water-routes,  still  utilized  by 
their   successors.      The   deep    Hudson    River  ^ 

1  To  those  who  are  students  of  both  geology  and  economics 
it  is  interesting  that  the  Hudson  is  a  partially  "  drowned " 
river  and  that  it  owes  its  commercial  importance  to  a  slight 
subsidence  and  submergence  of  the  old  river  valley. 


42  ECONOMICS 

with  the  magnificent  harbor  at  its  mouth ;  the 
Delaware  and  Potomac  with  their  broad  estu- 
aries ;  the  rolling,  unbroken  prairies  of  the 
central  states ;  the  unique  system  of  fresh- 
water lakes ;  the  gradual  rise  of  the  entire 
continent  toward  the  west,  as  if  to  encourage 
directly  a  rapid  colonization  by  Europeans ; 
the  rivers  and  mountains  extending  from  north 
to  south,  as  if  to  insure  the  social  and  political 
unity  which  differences  of  climate  and  natural 
productions  might  otherwise  render  difficult,  — 
all  these  geographical  characteristics  of  the 
continent  enter  as  determining  elements  into 
her  economic  environment.  The  commerce 
and  industry  of  America,  her  art  and  letters, 
her  politics  and  laws,  her  life  and  thought,  will 
ultimately  be  influenced  by  her  climate  and 
soil  and  geographical  contour. 

Reference  must  be  made,  in  closing  this 
chapter,  to  the  possession  of  what  are  known 
as  mineral  resources.  In  the  popular  mind 
the  importance  of  these  resources  to  national 
welfare  is  usually  exaggerated,  but  it  cannot 
be  denied  that  their  presence  exercises  a  great 
influence  upon   the   character   of   the  national 


THE  ECONOMIC   ENVIRONMENT  43 

industry,  and  they  must  therefore  be  reckoned 
as  a  part  of  the  environment. 

Iron  ore  deserves  the  first  rank  among  the 
mineral  resources  of  the  earth,  because  of  its 
wide  distribution  and  its  high  place  in  the 
history  of  the  arts.  It  is  the  most  "useful"  of 
the  metals,  if  in  assigning  their  relative  rank 
we  consider  only  the  number  of  uses  to  which 
they  may  be  put  and  the  essential  relation  of 
such  uses  to  the  most  primitive  wants  of  man. 
Copper,  tin,  and  lead  are  useful  in  the  same 
sense  of  that  word.  Silver  and  gold  possess 
qualities  that  have  given  them  a  unique  relation 
to  man's  welfare  from  very  early  ages.  Well 
adapted  to  many  important  industrial  uses,  they 
are  also  prized  for  purposes  of  personal  adorn- 
ment, and  in  later  stages  of  social  development 
they  are  found  to  be  better  suited  than  any 
other  substances  to  serve  as  a  medium  for  the 
exchange  of  goods. 

The  environment  provides,  besides  the  min- 
eral deposits,  the  results  of  animal  and  vege- 
table life.  Such  things  as  are  provided 
spontaneously  in  a  form  capable  of  satisfying 
man's  wants,   are  to  be  regarded  as  products 


44  •  ECONOMICS 

of  the  environment  rather  than  of  man*s  eco- 
nomic activity.  The  most  conspicuous  example 
is  coal,  which,  although  a  vegetable  product  of 
past  ages,  yet  from  an  economic  point  of  view- 
resembles  mineral  deposits  more  closely  than 
it  does  ordinary  vegetable  products. 

It  will  be  more  convenient  to  regard  the 
environment  as  providing  in  general  only  the 
forces  and  crude  materials  of  industry,  and 
to  treat  all  vegetable  and  animal  products, 
together  with  the  utilization  of  mineral  re- 
sources, in  a  later  chapter. 


CHAPTER   III 

THE   SOCIAL    CONDITIONS    OF   AN   ECONOMIC 
SOCIETY 

It  was  said  at  the  opening  of  the  preceding 
chapter  that  the  environment  is  partly  physical 
and  partly  social.  Having  outlined  the  physi- 
cal environment,  we  may  next  consider  the 
social  conditions  of  our  economic  life. 

Family  life,  education,  religion,  government, 
property,  law,  rebellion,  riot,  race  antagonisms, 
and  the  desire  for  association,  are  less  tangible 
than  the  features  of  the  physical  environment, 
but  they  are  not  less  real  or  less  important. 
Social  institutions,  and  the  social  nature  of 
man  from  which  they  grow,  are  fundamental 
facts  of  economics. 

Association  with  one's  kind  is  the  beginning 
of  social  evolution.  There  is  no  society  of  any 
sort  until  individuals  are  able  to  compare  expe- 
riences. There  is  no  advance  in  economic  ac- 
tivity until,  as  a  result  of  association,  men  are 
able  to  compare  the  results  of  different  actions 
45 


46  ECONOMICS 

with  relation  to  the  quantity  and  quality  of  the 
goods  which  those  actions  produce.  Desire  for 
association  is  itself  one  of  the  most  powerful 
of  the  influences  which  determine  man's  actions. 
It  furnishes  the  incentive  to  much  of  his  indus- 
trial activity.  It  modifies  the  form  of  that 
activity  at  every  stage. 

When  we  speak  of  the  desire  for  association 
as  one  of  the  influences  which  determine  man's 
action,  we  do  not  refer  exclusively  to  such 
desire  for  association  as  appears  in  well-de- 
veloped society  and  finds  expression  in  various 
kinds  of  social  institutions.  We  include  also 
those  instinctive  tendencies  for  association 
which  characterize  primitive  man  and  gregari- 
ous animals  in  general. 

Economic  discussions,  strictly  speaking,  take 
account  only  of  those  activities  which  result 
from  conscious  balancing  of  motives  and  re- 
wards. But  there  are  countless  activities  in 
which  there  is  no  such  conscious  act  of  judg- 
ment, but  only  an  immediate  reaction  to  some 
impulse  springing  from  the  physical  environ- 
ment or  from  man's  mental  mechanism. 

We  are  at  present  considering  these  prelimi- 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY     47 

nary  conditions  of  the  economic  order.  It  is 
impossible  to  form  any  just  idea  of  the  facts  of 
man's  economic  life  until  we  recognize  clearly 
that  this  economic  life  is  only  a  fragment  of  his 
complete  existence.  As  a  result  of  physical 
and  spiritual  forces,  operating  through  many 
ages,  man  has  become  a  creature  with  given 
instincts,  desires,  and  capacities.  Before  we  can 
understand  what  would  happen  under  given 
economic  conditions  we  must  consider  the 
nature  of  man  as  a  whole,  and  form  some 
estimate  of  the  relative  strength  of  the  eco- 
nomic motive  as  compared  with  the  social  and 
physical  influences  to  which  he  has  been  sub- 
jected. It  is  on  this  account  that  we  preface 
our  statement  of  economic  principles  with  some 
account  of  the  physical  and  social  environment 
in  the  midst  of  which  man's  economic  activity 
takes  place. 

Association  might  be  made  prominent  in  a 
list  of  economic  motives  strictly  so  called,  but 
its  present  importance  for  us  is  more  fundamen- 
tal ;  for  it  is  one  of  the  first  and  most  necessary 
social  conditions  of  any  such  economic  life  as 
now  exists  upon  the  earth. 


48  ECONOMICS 

The  Institution  of  the  Family  may  be  placed 
second  among  these  social  conditions.  It  is  not 
necessary  to  enter  upon  an  elaborate  investiga- 
tion of  the  form  of  the  primitive  family.  (  What 
concerns  us  is  not  the  order  of  social  evolution, 
but  the  social  conditions  of  our  present  eco- 
nomic life.  Among  these  the('family  takes  a 
very  high  rank.  Examples  of  a  society  in 
which  the  family  does  not  hold  any  such  posi- 
tion are  abundant.  Primitive^^eoples  even  now 
exist  in  which  the  tribe  rather  than  the  family 
is  the  unit  in  the  consumption  of  acquired 
wealth.  The  reward  of  the  chase  and  the 
booty  of  conquest  are  shared,  if  not  equally,  at 
least  with  reference  chiefly  to  the  relation  which 
the  individual  bears  to  the  tribe.  Where  the 
guild  and  apprenticeship  system  prevailed,  ap- 
prentices lived  frequently  with  the  master-work- 
man. For  many  purposes  the  unit  for  the 
enjoyment  and  consumption  of  wealth  then 
included  a  large  number  of  persons.  Now, 
however,  in  all  countries  of  more  advanced 
civilization  the  unit  is  the  family.  This  fact  is 
of  the  greatest  significance  in  determining  the 
character   of    the   production    of    wealth.       It 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY     49 

stands  in  the  way  of  any  industrial  organiza- 
tion of  society  framed  with  the  sole  design  of 
seeking  the  largest  industrial  product.  Simi- 
larly in  the  political  organization  of  ancient 
Sparta,  designed  to  secure  the  highest  military 
efficiency,  it  was  necessary  virtually  to  abandon 
the  family  organization.  The  family,  on  the 
other  hand,  furnishes  a  new  motive  to  exertion, 
and,  if  steadiness  of  production  be  taken  into 
account,  a  far  stronger  motive  to  efficient  pro- 
duction than  is  supplied  by  the  desire  for  mere 
personal  welfare. 

It  has  been  recently  held  by  eminent  biologists 
that  the  doctrine  of  heredity,  so  far  as  it  in- 
volves the  transmission  of  acquired  characteris- 
tics from  parent  to  offspring,  must  be  abandoned. 
If.  this  position  is  generally  accepted,  it  will 
bring  intp  even  greater  prominence  the  family, 
and  such  other  social  institutions  as  are  instru- 
mental in  passing  on  from  one  generation  to 
another  the  accumulated  results  of  civilization 
and  human  experience.  It  will  require  greater 
emphasis  upon  the  educative  influences  sur- 
rounding the  new-born  infant,  as  the  chief 
means  of  treasuring  up  and  increasing  the  ca- 


50  ECONOMICS 

pacities  of  the  race.  Parental  love,  developed 
through  the  family,  occupies  the  first  place 
among  these  influences. 

The  mission  of  religion  is  to  bring  peace  on 
earth,  to  strengthen  the  moral  fibre,  to  aid  man 
in  his  search  for  means  of  satisfying  his  spiritual 
needs.  Religious  association  and  activity  exert 
an  influence  on  man's  character  which  affects 
his  capacity  for  the  highest  efficiency  in  produc- 
tion. Few  other  social  institutions  have  proven 
so  powerful  a  stimulus  to  undertakings  which 
require  the  cooperation  of  a  large  number  of 
persons  and  a  long  interval  of  time  for  their 
completion.  The  truest  economy  regularly  de- 
mands the  sacrifice  of  temporary  for  permanent 
good,  of  immediate  pleasure  for  a  greater  satis- 
faction in  the  future.  The  man  of  primitive 
instincts  finds  such  sacrifice  difficult,  and  if  he 
were  to  depend  purely  upon  the  economic  judg- 
ment of  the  moment  the  present  sacrifice  would 
too  often  outweigh  the  permanent  gain.  The 
sanctions  of  religion,  and  the  vivid  presentation 
of  duty  through  the  medium  of  religious  instruc- 
tion, prevail  against  these  mistaken  judgments, 
and  train  the  mind  to  a  more  active  realization 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY      5 1 

of  the  value  of  what  is  permanent,  as  against 
that  which  produces  passing  sensations  of  pleas- 
ure. It  is  precisely  in  this  respect  that  there  is 
found  the  greatest  difference  between  the  prim- 
itive instinct  and  the  economic  instinct.  It  is 
a  mistake,  though  not  an  uncommon  one,  to 
credit  the  economic  instinct  with  the  disposition 
to  place  material  satisfaction  above  those  which 
spring  from  man's  higher  nature.  The  true 
economic  instinct  guards  against  just  that  ten- 
dency. It  fixes  the  eye  upon  the  future  and 
highest  want,  rather  than  upon  the  lower  and 
immediate  want.  Whether  or  not  this  instinct 
might  have  been  developed  without  the  religious 
influence,  it  is  certain  that  religion  and  its  agent, 
the  church,  have  been  preeminent  among  social 
agencies  that  have  contributed  to  such  develop- 
ment. 

Some  system  of  general  education  may  like- 
wise be  assumed  to  be  an  indispensable  social 
condition  of  a  normal  economic  life.  The  ideal 
of  education  which  society  cherishes  determines 
to  what  extent  the  conditions  favorable  to  pro- 
duction shall  be  steadily  developed  and  perma- 
nently insured.     If  there  is  a  clear  idea  of  the 


^, 


52  ECONOMICS 

extent  to  which  scientific  and  thorough  develop- 
ment of  the  powers  of  the  future  workers  is 
essential  to  future  enjoyment,  there  will  be  a 
more  ready  acquiescence  in  the  sacrifice  neces- 
sary to  secure  it.  The  tendencies  favorable  to  a 
large  and  rational  production  of  wealth  may  be 
consciously  developed  by  society,  and  the  result 
will  be  of  permanent  advantage  to  the  race. 
The  economic  service  of  the  public  educational 
system  is  not  even  yet  estimated  at  its  true  value, 
nor  will  it  be  until  we  instinctively  attribute  a 
portion  of  the  value  of  all  industrial  products 
and  professional  services  to  the  labors  of  the 
teachers  who  train  the  children,  —  including 
teachers  of  workshop,  school,  and  home. 

A  society  which  looks  upon  all  "legislative 
interference  "  as  pernicious  will  have  a  different 
production,  both  in  kind  and  degree,  from  a 
society  in  which  the  state  is  an  active  and  sig- 
nificant factor  in  the  industrial  organization. 
While  the  state  is  an  outside  power,  imposing 
its  will  upon  subjects,  it  is  of  little  economic 
significance  save  as  it  arbitrarily  decides  what 
goods  shall  be  made  and  in  what  manner.  But 
when  through  the  democratic  organization  of 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY      53 

political  society,  action  by  the  state  has  come  to 
mean  only  one  particular  form  of  activity  rather 
than  another,  all  constraint  being  removed,  it 
assumes  an  entirely  new  character.  It  comes  to 
stand  for  collective  as  against  isolated  activity. 
The  state,  whether  acting  through  its  national 
organization  or  through  any  of  the  minor  politi- 
cal organs  (such  as  the  municipality  or  that 
larger  unit  called  in  America  the  state  govern- 
ment), becomes  the  most  convenient  and  man- 
ageable mechanism  for  accomplishing  a  large 
number  of  industrial  objects.  It  takes  upon 
itself  a  large  proportion  of  the  industrial  func- 
tions and  becomes  the  medium  through  which 
society  apportions  the  various  phases  of  eco- 
nomic activity  to  its  own-  agents,  to  corporate 
bodies,  or  to  private  persons.  In  this  latter 
capacity  the  state  is  the  logical  though  not  neces- 
sarily the  chronological  antecedent  of  every 
economic  activity.  It  is  a  social  institution  of 
an  indispensable  character. 

Another  institution  which  arises  in  very  early 
stages  of  social  development  is  that  of  property. 
The  primary  distinction  between  mine  and  thine 
lies  at  the  root  of  so  large  a  part  of  our  eco- 


54  ECONOMICS 

nomic  life,  that  it  would  be  difficult  for  us  with- 
out it  to  picture  any  sustained  effort  to  increase 
the  number  and  useful  qualities  of  goods.  It 
is  an  essential  element  in  our  present  ideas  of 
property  that  this  distinction  should  be  main- 
tained by  general  consent,  and  by  the  official 
recognition  of  the  state,  rather  than  by  individ- 
ual force.  What  is  recognized  is  the  right  of 
the  one  who  is  called  the  owner  of  the  property, 
so  far  as  its  nature  will  permit,  to  have  the  sole 
use  and  control  of  it.  He  may  transfer  this 
right  to  another  with  or  without  a  consideration. 
He  may  do  with  it  what  he  will,  so  that  he  do  not 
trespass  upon  recognized  rights  of  other  persons. 

A  distinction  between  private  and  public  (or 
collective)  property  becomes  sharply  drawn  in 
the  course  of  the  development  of  free  enter- 
prise. The  great  mass  of  wealth  becomes  the 
private  property  of  individuals.  The  title,  how- 
ever, is  not  an  absolute  one,  but  is  limited  by 
the  rights  of  the  public  to  a  share  for  public 
purposes,  and  by  any  considerations  of  public 
interest  which  the  state  may  see  fit  to  prescribe. 

Taxation,  the  process  by  which  the  right  of 
the  state  to  a  regular  share  in  the  proceeds  of 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY      55 

industry  is  realized,  may  be  looked  upon  as  one 
of  the  conditions  of  the  social  environment. 
Taxation  is  not,  in  the  long  run,  a  deduction 
from  income,  but  an  investment.  A  canal  is 
built  in  order  that  the  industrial  product  may  be 
increased ;  and  the  necessary  taxation  is  a  pre- 
liminary investment.  Short-sighted  critics  of 
public  enterprises  of  this  sort  often  find  fault 
because  the  moderate  fees  usually  charged  do 
not  yield  on  their  face  a  good  return  upon  the 
investment,  entirely  losing  sight  of  the  increase 
of  fees  that  would  be  necessary  to  pay  satisfac- 
tory returns  under  private  management.  The 
Post  Office  furnishes  a  good  illustration.  If  the 
Post  Office  department  reports  a  deficit,  there  is 
at  once  an  outcry  at  the  failure  of  the  govern- 
ment, whereas  the  real  test  is  whether  the 
public  has  received  a  due  return  for  its  total 
investment,  which  is  to  be  ascertained  by  add- 
ing the  amount  of  the  deficit  to  be  raised  by 
taxes  to  the  amount  realized  by  the  sale  of 
stamps.  The  years  in  which  there  has  resulted 
a  surplus  are  by  no  means  necessarily  to  be  con- 
sidered the  years  of  best  management. 

Taxation  is  thus  the  initial  stage  in  a  particu- 


56  ECONOMICS 

lar  method  of  carrying  on  industry.  But  in 
order  that  that  method  may  be  effective  it  is 
necessary  that  a  comprehensive  system  of  tax- 
ation should  be  established,  that  there  should 
be  a  ready  acquiescence  in  the  imposition  of 
various  kinds  of  taxation,  that  taxation  should 
fall  less  upon  individuals  than  upon  the  individ- 
ual proceeds  of  the  national  industry,  that  the 
system  of  taxation  should  be  uniform  and  stable, 
so  that  industry  may  adapt  itself  to  it  as  it  does 
to  any  obstacle  in  the  physical  environment. 
It  is  in  this  way  only  that  inequality  in  the 
treatment  of  individuals  can  be  avoided,  and  an 
equitable  and  useful  system  of  taxation  main- 
tained. Attention  has  been  concentrated  upon 
the  effort  to  find  an  equitable  system  of  taxation. 
This  is  no  doubt  desirable,  but  it  is  still  more  de- 
sirable to  find  one  which  is  economically  useful. 
Until  such  a  system  is  reached,  the  taxation 
which  exists  in  any  society  cannot  be  intelli- 
gently reckoned  with  as  a  normal  feature  of  the 
social  environment.  When  it  has  once  been 
realized,  taxation  may  be  utilized  for  social  ends 
as  readily  as  any  other  social  institution. 

Credit  is  so  fundamental  a  condition  of  eco- 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY      57 

nomic  society  that  our  whole  system  of  economic 
activity  is  sometimes  said  to  rest  upon  it ;  —  and 
this  is  not  far  from  the  truth.  Confidence  of 
the  members  of  society  in  their  political  govern- 
ment permits  the  use  of  money  as  a  tool  of 
exchange.  Confidence  in  each  other  permits 
them  to  make  many  exchanges  without  the  in- 
tervention of  money.  When  such  exchanges 
are  between  two  persons  directly  they  are  called 
barter,  and  if  neither  party  postpones  payment 
no  credit  is  involved.  If,  however,  either  party 
does  postpone  payment,  or  if,  as  more  frequently 
happens,  the  exchanges  are  indirect,  involving 
three  or  more  parties  with  a  lapse  of  time  be- 
tween the  transactions,  then  credit  becomes  an 
important  element.  Where  there  is  mutual  con- 
fidence in  the  business  integrity  of  those  who 
are  brought  into  such  relations,  the  making  and 
the  exchange  of  goods  may  assume  a  form  with 
essentially  different  characteristics  from  those 
of  the  primitive  industry  which  prevails  where 
it  is  absent. 

The  final  principle  which  need  be  enumerated 
among  the  features  of  the  social  environment, 
is  that  of  social  organization.      From  the  sim- 


58  ECONOMICS 

plest  gathering  for  informal  discussion  ^  to  the 
elaborate  organization  of  municipal  enterprise, 
foreign  missions,  or  fraternal  orders,  the  capa- 
city of  society  for  effective  organization  appears 
constantly  as  a  condition  of  its  economic  prog- 
ress. The  most  important  movements  for  defi- 
nite organization  often  lie  entirely  outside  the 
field  marked  out  by  the  state  for  its  own  activ- 
ity, and  they  are  thus  dependent  upon  the  vol- 
untary cooperation  of  their  adherents.  Such 
movements  as  that  for  the  organization  of  char- 
ity illustrate  the  importance  of  the  general  prin- 
ciple, while  the  disposition  in  some  places  to 
entrust  the  entire  supervision  of  public  and  pri- 
vate charity  to  public  officials  is  an  instance  of 
the  easy  transition  from  individual  to  collective 
action. 

All  the  various  social  conditions  of  economic 
activity,  like  the  various  features  of  the  physical 
world,  are  interdependent,  and  they  constitute 
not  a  series  of  conditions  to  be  reckoned  with 
individually,  but  a  definite  environment^  within 
which  society  must  carry  on  its  economic  life,  to 

1  Invariably  resulting,  it  is  said,  in  America,  in  the  election 
of  a  presiding  officer  and  a  secretary. 


SOCIAL  CONDITIONS  OF  ECONOMIC  SOCIETY      59 

which  that  life  must  be  made  to  conform,  from 
which  it  will  draw  materials  for  the  changes, 
whether  moderate  or  radical,  of  the  future. 
Many  features  of  this  environment  will  vanish, 
one  by  one,  as  newer  and  more  adequate  condi- 
tions appear.  Organization  is  dependent  upon 
association  and  credit.  The  state  is  dependent 
upon  property  and  taxation.  Education  rests 
upon  the  family,  the  church,  and  the  state.  In- 
dustry is  influenced  by  all  social  agencies.  To 
the  economic  man  the  social  environment  is  as 
real  and  as  significant  as  his  physical  surround- 
ings. The  two  are  never  sharply  distinguished, 
but  blend  into  an  economic  environment  with 
both  physical  and  social  features. 


CHAPTER   IV 

THE   MAKING    OF    GOODS 

In  the  present  chapter  we  pass  from  a  con- 
sideration of  man's  surroundings  to  that  of  his 
activities.  Broadly  speaking,  all  human  activ- 
ity may  be  described  as  the  increasing  of  the 
number,  or  the  improving  of  the  useful  qualities, 
of  goods.  Every  object  which  ministers  to  a 
human  desire  is  a  good,  in  the  economic  sense. 
There  are  many  such  things  in  nature,  and  in 
primitive  stages  of  civilization  these  free  goods 
are  accepted  as  adequate  satisfaction  of  the 
desires  of  men,  with  little  attempt  to  increase 
their  number  or  to  improve  their  useful  qualities. 
But  as  man  becomes  more  at  home  in  his  en- 
vironment, he  discovers  that  increase  and  im- 
provement are  possible. 

Fruit  and  nuts,  and  the  flesh  and  skin  of  ani- 
mals, are  easily  appropriated,  and  this  appropri- 
ation is  among  the  earliest  steps  in  the  making 
of  goods.  It  must  be  understood  that  the  mak- 
60 


THE   MAKING   OF  GOODS  6 1 

ing  of  goods  does  not  involve  the  creation  of  the 
material  substance  of  the  commodities.  In  that 
sense  no  goods  are  made  by  the  persons  to 
whom  they  are  attributed.  What  is  done  is  to 
give  to  the  commodity  a  form  which  especially 
fits  it  to  supply  some  want,  and,  after  patient 
observation  of  the  natural  processes  involved  in 
producing  the  materials  from  which  the  new 
commodity  has  been  made,  to  modify  those  pro- 
cesses in  such  a  way  as  to  increase  the  quantity 
of  available  materials. 

No  sooner  is  it  clearly  understood  that  certain 
things  have  the  power  of  satisfying  continually 
recurring  wants,  than  it  becomes  apparent  that 
it  would  be  desirable  to  secure  a  regularly  re- 
curring supply  of  those  things.  The  objects 
which  are  consciously  or  instinctively  aimed  at 
in  the  making  of  goods  are :  the  increase  in  the 
number  of  commodities  of  which  the  utility  is 
recognized,  increased  regularity  in  the  supply 
of  those  commodities,  increase  in  the  utility  (or 
want-satisfying  power)  of  commodities.  In  ac- 
complishing the  third  object,  combinations  of 
materials  are  made  which  result  in  commodities 
entirely  unlike  any  objects  found  in  nature,  but 


62  ECONOMICS 

nevertheless  capable  of  satisfying  entirely  natu- 
ral wants.  Houses  are  constructed  which  serve 
the  purpose  of  shelter  better  than  the  caves  of 
the  hillsides  or  the  tents  of  skins.  Food  is  made 
from  cultivated  grains  which  supplements  the 
fruits,  nuts,  and  flesh  of  animals,  and  is  a  phys- 
iological gain.  Even  the  chase  is  made  more 
effective  by  the  invention  of  firearms.  The 
substitution  of  goods  that  are  made  for  goods 
that  are  found,  is  a  characteristic  of  economic 
progress,  the  goal  of  which  is  to  place  man  in  a 
position  to  bring  together,  where  he  will,  the 
elementary  materials  of  production,  in  order 
that  his  residence  may  be  determined  by  social 
or  aesthetic  considerations  and  not,  as  in  earlier 
stages,  by  stern  physical  necessities.  Men  may 
build  their  homes,  for  example,  on  beautiful 
sites,  and  are  not  restricted  to  unpleasant  spots 
selected  because  there  are  springs  near  by,  or 
because  there  are  woods  to  break  the  force  of 
the  wind. 

Two  great  movements  are  in  progress  con- 
temporaneously, from  the  moment  when  this 
making  of  goods  begins :  viz.,  the  adaptation 
of  man's  activity  to  his   environment,  and  the 


THE   MAKING  OF  GOODS  63 

gradual  modification  of  that  environment  itself, 
—  or  as  it  has  recently  been  expressed  ^  —  the 
creation  of  a  new  environment  within  and  from 
the  materials  of  the  old.  When  the  growth  is 
complete,  the  new  will  cast  off  the  shell  of  the  old, 
but  will  give  place  later  to  still  newer  surround- 
ings. In  illustration  of  the  first  of  these  two 
movements,  the  adaptation  of  man's  activity  to 
his  environment,  attention  may  be  called  to  cer- 
tain peculiarities  in  the  operation  of  the  physi- 
cal forces  enumerated  in  the  preceding  chap- 
ter. Some  of  these  forces  are  periodic  in  action, 
others  are  localized,  in  such  a  manner  that  they 
are  available  only  at  certain  places  on  the  earth's 
surface.  There  is  always  present,  for  example, 
a  certain  amount  of  light  and  heat,  but  the 
direct  rays  of  the  sun  are  periodic,  day  alternat- 
ing with  night  and  the  heat  of  summer  with  the 
lower  temperature  of  winter. 

This  periodic  action  of  natural  forces  has  an 
important  influence  upon  economic  activity, 
since  the  forces  must  be  utilized  at  the  time 
when  they  are  active.  The  succession  of  sea- 
sons  dictates  the  times  of  sowing,  cultivating, 

1  Patten,  The  Theory  of  Social  Forces. 


64  ECONOMICS 

and  harvest,  in  agriculture,  of  the  cessation  of 
the  shipping  of  the  colder  regions  because  of 
the  freezing  over  of  rivers,  of  activity  in  the 
building  trades  and  in  many  other  industries. 

Location  is  an  element  of  no  less  importance. 
Coal,  machinery,  and  muscular  force  may  be 
taken  with  ever-lessening  difficulty  to  the  places 
where  they  are  needed ;  but  a  waterfall,  a  har- 
bor, and  fertile  soils  must  be  utilized  where  they 
are  found.  The  adaptation  of  economic  activity 
to  environment  requires  the  discovery  of  the 
peculiar  advantages  of  each  region  and  the 
planting  of  those  industries  in  each  for  which  it 
is  best  fitted.  That  this  process  is  by  no  means 
complete  is  excellently  illustrated  by  the  luxu- 
riant growth  of  weeds  sometimes  noticed  in 
roads  alongside  cultivated  fields  in  which,  with 
great  labor,  man  has  induced  only  a  scanty 
growth  of  grain.  This  comparative  failure  of 
man  may  be  caused  by  a  lack  of  proper  methods 
of  cultivation  or  fertilization,  but  it  is  often  due 
to  a  mere  blunder  in  deciding  what  crops  to 
plant  in  the  fields  in  question.  The  growth  of 
weeds  attests  the  fertility  of  the  soil.  The 
scantiness  of  the  crop  is  equally  good  evidence 


THE  MAKING  OF  GOODS  6$ 

that  there  is  no  adequate  adaptation  of  plant 
and  cultivation  to  natural  conditions. 

It  is  true  that  some  of  the  limitations  of  local- 
ity are  removed  in  the  course  of  human  prog- 
ress. The  waterfall  remains  where  nature 
has  placed  it,  but  its  energy  is  transformed 
into  electricity  and  carried  a  long  distance. 
The  soil  of  a  large  area  is  too  bulky  for  re- 
moval by  man,  but  it  is  changed  radically  by 
the  addition  of  new  constituents.  These  consid- 
erations modify,  but  they  do  not  destroy,  the 
effect  of  the  principle  that  industry  must  adapt 
itself  to  the  localization  of  natural  forces.  Other 
things  being  equal,  there  is  economy  in  utilizing 
the  forces  of  nature  at  the  places  where  they 
are  found  or  where  they  are  most  easily  con- 
trolled, just  as  there  is  economy  in  utilizing  them 
at  the  time  when  they  are  in  the  most  avail- 
able form  or  when  they  are  most  active. 

A  third  characteristic  of  the  natural  forces  is, 
that,  in  order  to  secure  satisfactory  results,  it  is 
necessary  that  they  be  set  in  motion  in  a  par- 
ticular order,  that  the  exact  series  of  motions 
which  will  produce  the  desired  result  be  discov- 
ered, and  that  the  series  be  sufficiently  extended 


66  ECONOMICS 

to  permit  the  most  efficient  action  of  the  requi- 
site forces.  In  modern  industry  the  series  of 
motions  involved  in  securing  even  a  simple 
result  is  often  extended  and  complicated.  If 
we  desire  to  purchase  a  book,  it  is  a  simple 
matter  to  make  the  exchange  and  secure  pos- 
session of  it.  But  the  series  of  actions  which 
the  purchase  presupposes  is  well-nigh  infinite. 
The  existence  of  the  retail  and  wholesale  book 
stores  through  which  the  book  has  come,  the 
printing  establishment,  the  work  of  the  author, 
his  preparation  and  all  the  antecedent  forces 
that  have  induced  him  to  write,  the  conditions 
that  have  made  a  demand  for  the  particular 
book,  —  these  are  only  a  few  of  the  most  obvi- 
ous members  of  the  series.  A  complete  analy- 
sis would  trace  back  the  various  steps  in  the 
growth  of  each  of  the  contributing  industries. 
What  is  to  be  noticed  is,  that  it  is  this  infinite 
complexity  which  secures  the  simple  and  ready 
result.  If  any  steps  in  the  series  were  omitted, 
the  difficulty  of  securing  the  result  which  we 
now  desire  would  be  vastly  increased. 

If  we  can    imagine  a  society  in  which  the 
members   attempt   to   satisfy   their   desires   di- 


THE  MAKING  OP^  GOODS  '  67 

rectly  without  the  intervention  of  complex 
serial  processes,  the  advantages  of  the  present 
system  will  become  clear.  The  man  who  de- 
sired a  book  in  such  a  society  would  be  under 
the  necessity  of  preparing  it.  But  there  would 
be  the  work  of  a  lifetime  in  preparing  the 
materials,  if,  indeed,  it  were  not  all  spent  in 
attempting  to  understand  the  difficulties  of 
even  this  preliminary  task.  (The  principle  is, 
that  there  is  economy  in  far-sighted  direction 
of  the  natural  forces,  which  secures  their  action, 
in  a  part  of  the  series,  long  in  advance  of  the 
time  when  the  given  result  is  expected.  '  This 
serial  action  of  the  forces  of  nature  is  one  of 
those  primary  conditions  of  the  economic  envi- 
ronment which,  like  the  periodic  action  of  cer- 
tain forces  and  the  localization  of  others,  rank 
among  the  premises  of  economic  study. 

A  fourth  condition  worthy  of  attention  is  that, 
for  a  period  which  can  be  calculated  with  some 
degree  of  accuracy,  products  retain  the  form 
given  them.  Ultimately  all  material  forms 
change.  Vegetable  and  animal  bodies  die  and 
decay,  rocks  disintegrate,  the  products  of 
human    labor    are    consumed    or    perish;    but 


UNW 


68  ECONOMICS 

they  offer  greater  or  less  resistance  to  change 
and  disintegration,  and  this  fact  is  of  prime 
importance  in  all  economic  life.  The  discov- 
ery of  methods  by  which  greater  permanence 
can  be  secured  when  desired,  is  one  of  the  great- 
est economic  services.  A  long  step  forward  is 
taken  when  man  substitutes  for  the  perishable 
food  of  the  savage,  food  which  can  be  preserved 
for  months,  though  a  still  more  important  step 
is  taken  when,  through  improvements  of  com- 
munication, man  is  rendered  independent  of  the 
necessity  for  such  preservation  of  food,  by  the 
certainty  that  constant  supplies  will  be  forth- 
coming from  all  quarters  of  the  globe. 

In  the  preceding  paragraphs  illustrations  have 
already  been  given  of  the  second  great  move- 
ment in  economic  progress,  viz.,  that  gradual 
modification  of  man's  surroundings,  which, 
when  it  passes  critical  stages,  may  be  de- 
scribed as  the  creation  of  a  new  environment 
from  the  materials  of  the  old.  Man  does  not 
escape  from  his  environment  by  these  changes, 
but  he  renders  it  richer  in  the  possibilities  of 
goods.  Industry  must  become  adapted  to  the 
new  environment  as,  formerly,  to  the  old,  under 


THE   MAKING  OF  GOODS  69 

penalties  which  are  greater  rather  than  less ; 
but  the  advantages  of  such  adaptation  are  also 
greater.  Irrigation,  modification  of  soils  by  the 
addition  of  essential  elements  of  plant  food,  and 
the  planting  of  forests,  are  obvious  illustrations 
of  the  changes  made  by  man  in  the  physical 
aspects  of  nature.  Changes  in  the  character  of 
vegetation  and  in  the  breeds  of  animals,  brought 
about  by  conscious  effort,  are  essentially  similar. 
A  change  of  environment  has  sometimes  been 
secured  by  a  bodily  migration  to  new  regions  of 
the  earth.  Under  the  new  conditions,  faculties 
hitherto  latent  are  developed  and,  since  some 
communication  is  usually  retained  \vith  those 
left  behind,  the  environment  is  virtually  enlarged 
to  include  the  best  features  of  both  the  old  and 
the  new  regions.  The  discovery  of  appliances 
by  which  new  forces,  as  steam  or  electricity,  may 
be  applied  to  the  making  of  goods,  enlarges 
and  improves  the  environment,  by  vastly  increas- 
ing the  number  and  variety  of  goods  which  re- 
sult from  a  given  expenditure  of  energy.  The 
development  of  the  factory  industries,  at  the 
opening  of  the  present  century,  modified  the 
environment  of  English  economic  activity  more 


yO  ECONOMICS 

than  it  would  have  been  modified  by  a  diver- 
sion of  the  Gulf  Stream  or  the  drying  up  of 
the  Thames.  The  universal  introduction  of 
steel,  within  the  past  fifty  years,  into  railway 
and  steamship  construction,  into  ofifice  buildings, 
bridges,  and  other  public  works,  and  the  exten- 
sion of  its  use  in  industrial  and  agricultural 
machinery,  has  transformed  the  present  envi- 
ronment beyond  calculation. 

These  changes  require  corresponding  changes 
in  man's  activity,  and  the  prosperity  of  any 
community  is  determined  chiefly  by  the  prompt- 
ness with  which  its  industry  is  modified  to  suit 
the  new  jx)ssibilities  of  the  modified  environ- 
ment. It  would  be  too  much  to  say  that  the 
environment  is  determined  by  the  new  element 
which  rises  to  so  great  prominence,  for  all  the 
previous  features,  both  physical  and  social,  must 
still  be  taken  into  account;  but  the  revolution 
resulting  in  the  first  illustration  from  the  use  of 
steam,  and  in  the  second  from  the  use  of  steel, 
makes  the  environment  essentially  new  and  dif- 
ferent and  requires  a  readjustment  of  the  en- 
tire set  of  economic  activities.  The  making  of 
goods  in  one  generation  may  demand  different 


THE  MAKING  OF  GOODS  71 

qualities  from  those  of  another,  and  the  power 
to  compete  successfully  in  the  great  struggle  for 
existence  may  depend  upon  the  ability  to  secure 
the  necessary  readjustment  promptly.  A  lack 
of  such  ability,  whether  physical,  economic,  or 
social,  may  mean  serious  diminution  of  welfare, 
or  even,  for  special  classes,  entire  destruction. 

The  initial  factor  in  the  making  of  goods  is 
the  possibility  of  utilizing  the  results  of  plant 
growth.  The  cultivation  of  plants  may  there- 
fore be  regarded  as  the  beginning  of  industry. 
The  flesh  of  animals  used  for  food  may  be  re- 
garded merely  as  grain  and  grass  in  a  more  con- 
venient form.  Timber  and  cabinet  wood,  flax 
fibre,  resins  and  rubber,  perfumes,  oils,  and 
medicines  from  the  vegetable  kingdom,  in  so  far 
as  they  are  not  already  objects  of  regular  culti- 
vation like  cereals,  will  probably  become  so,  as 
industry  is  more  highly  developed.  The  vegeta- 
tion of  the  sea  yields  fish,  as  that  on  the  land 
yields  bread  and  meat,  and  under  cultivation 
might  be  made  to  yield  a  very  considerable  part 
of  the  necessary  food  supply.^     Already  the  cul- 

1  Atwater,  "  The  Food  Supply  of  the  Future,"  in  Novem- 
ber (1891)   Century  Magazine. 


72  ECONOMICS 

tivation  of  oysters  in  favorable  coast  regions  has 
become  a  considerable  industry,  and  the  various 
fish  commissions  are  taking  measures  to  stock  the 
inland  rivers  and  lakes  with  suitable  varieties  of 
fish. 

The  extractive  industries,  of  which  the  culti- 
vation of  plants  is  an  illustration,  are  supple- 
mented by  the  carrying  and  manufacturing 
industries.  We  must  avoid  the  vulgar  error  of 
supposing  that  the  extractive  industries,  such  as 
farming  and  mining,  are  in  any  preeminent  de- 
gree productive.  Merely  because  they  are  the 
first  step  in  the  process  of  securing  control  of 
the  goods  which  the  environment  is  able  to  pro- 
vide, it  does  not  follow  that  this  is  an  essentially 
different  step  from  those  that  follow.  It  would 
be  no  less  absurd  to  give  to  the'  water  which  is 
engaged  in  disintegrating  the  rock  of  the  hills 
preeminence  over  that  which  nature  uses,  in 
carrying  the  soil  into  the  valleys  and  in  mixing 
its  various  ingredients.  The  making  of  goods 
is  the  name  for  the  entire  series  of  activities  by 
which  man  secures  from  his  surroundings  the 
satisfaction  which  his  nature  demands. 


CHAPTER  V 

THE   CONSUMPTION   OF   GOODS 

It  is  not  until  we  reach  that  part  of  eco- 
nomics which  treats  of  the  consumption,  or  use, 
of  goods  that  we  come  into  direct  contact  with 
the  central  fact  of  the  science,  viz.,  the  relation 
between  the  economic  environment  and  man's 
welfare.  If  we  can  imagine  a  complete  cessa- 
tion of  all  economic  activity  for  an  instant,  with 
man  left  in  possession  of  the  goods  already 
created,  and  if  those  goods  are  supposed  to  be 
in  sufficient  quantities  to  satisfy  all  possible 
human  desires  for  a  brief  period,  as  for  one 
day,  there  will  then  be  removed  one  of  the 
chief  limitations  upon  consumption,  at  least  for 
that  day,  viz.,  the  labor  involved  in  the  making 
of  the  goods.  Are  there  any  other  limitations 
that  would  remain  ? 

Each  consumer  would  find  that  the  quantity 
of  any  given  article  which  he  could  use  would 
be  limited,  first,  by  the  feeling  of  satiety  that 
73 


74  ECONOMICS 

would  follow  its  uninterrupted  consumption ; 
secondly,  by  the  time  at  his  disposal  if  he  is  to 
derive  any  benefit  from  other  goods ;  thirdly,  by 
the  fact  that  its  consumption  may  be  incompat- 
ible in  kind  with  other  pleasures  from  different 
sources ;  and,  finally,  in  the  case  of  some  com- 
modities, by  the  pain  and  inconvenience  in- 
volved in  the  act  of  consumption.  If  all  these 
limitations  could  be  successively  removed,  as 
that  of  cost  is  removed  in  the  supposed  case, 
we  should  finally  have  a  consumer  who  would 
not  need  to  consider  the  quantity  of  goods  at 
his  disposal,  for  there  would  always  be  suflfi- 
cient  to  supply  his  wants ;  nor  the  relative 
pleasure  to  be  derived  from  different  sources, 
for  there  would  be  time  for  all ;  nor  the  har- 
mony to  be  established  by  judicious  choice  and 
grouping  of  goods,  for  no  one  would  be  dis- 
cordant or  incompatible  with  the  others ;  nor 
the  effect  upon  welfare,  for  the  consumption 
would  not  be  accompanied  by  inconvenience  or 
evil  consequences ;  nor,  finally,  the  cost  of 
goods,  for  they  are  supposed  to  be  supplied 
without  exertion.  Such  a  consumer  would  not 
only   have  at  his   command  infinite  resources, 


THE  CONSUMPTION  OF  GOODS  75 

but  would  be  freed  from  all  present  limitations 
upon  their  utilization  in  the  satisfaction  of 
wants. 

The  case  supposed  indicates  the  manifold 
character  of  the  relation  between  man  and 
goods.  It  may  be  said  vaguely  that  all  human 
beings  desire  all  good  things,  and  that  if  no 
cost  were  attached  to  them  every  one  would 
enjoy  them  in  unlimited  degree.  But  besides 
the  limitation  of  cost,  and  the  others  which 
have  been  enumerated  and  which  spring  from 
the  very  nature  of  consumption,  the  statement 
as  made  requires  further  limitation.  It  pre- 
supposes complete  knowledge  of  the  infinite 
variety  of  satisfactions  which  the  environment  is 
capable  of  yielding,  and  of  the  steps  necessary 
to  secure  them.  It  assumes  knowledge  of  the 
best  combinations  to  be  rnade  among  want- 
satisfying  commodities,  knowledge  of  the  order 
in  which  they  should  be  consumed  to  derive 
the  maximum  of  pleasure,  and  the  possession 
of  a  nature  capable  of  enjoying  the  higher 
pleasures  without  sacrifice  of  the  lower. 

From  these  considerations  it  appears  that 
we  must  undertake  an   independent  survey  of 


76  ECONOMICS 

consumption  and  learn  something  of  its  prin- 
ciples. It  will  not  answer  to  take  it  for  granted 
that  good  things  are  desired,  and  to  confine  our 
inquiries  to  the  processes  by  which  they  are 
brought  into  being.  We  must  inquire  what 
things  are  desired,  in  what  order,  in  what  rela- 
tive degree,  and  with  what  effect  upon  human 
welfare.  We  must  inquire  how  people  come  to 
attach  more  importance  to  some  goods  than  to 
others,  and  more  to  certain  quantities  of  any 
given  article  than  to  additional  quantities; 
why  the  order  in  which  goods  are  estimated  is 
different  at  one  time  from  the  order  which 
prevails  earlier  or  later;  and  why  this  order 
is  sometimes  subject  to  violent  fluctuations. 
Finally  we  must  inquire,  whether  social  prog- 
ress is  attained  primarily  by  a  modification  in 
the  character  and  order  of  man's  wants,  or  by 
a  modification  in  the  character  and  intensity  of 
his  activities,  or  by  an  admixture  of  the  two. 
In  our  preliminary  view  of  the  making  of 
goods  we  have  had  to  do  entirely  with  forces, 
physical  and  social.  Wealth  is  produced  by 
the  operation  of  physical  forces  on  material 
substances.       These    forces    are    under   man's 


THE  CONSUMPTION  OF  GOODS  77 

control,  and  it  has  therefore  been  necessary  to 
consider  the  social  conditions  of  economic  activ- 
ity, as  well  as  the  physical  conditions  upon 
which  it  is  based.  In  the  study  of  consump- 
tion we  have  to  do  with  utilities.  A  utility,  in 
its  concrete  sense,  is  that  which  satisfies  a  de- 
sire. A  good,  or  commodity,  is  the  material 
substance  in  which  a  utility  or  a  group  of  utili- 
ties is  embodied.  We  are  therefore  viewing  in 
a  different  way  the  same  goods  into  the  making 
of  which  we  have  already  had  glimpses. 

The  making  of  goods  would  be  described 
with  perfect  accuracy  as  the  creation  of  utili- 
ties. Although  in  industry  no  matter  is 
created,  matter  which  was  without  the  power 
of  satisfying  desire  is  put  into  such  form,  or 
removed  to  such  place,  as  to  endow  it  with 
that  power,  or,  in  other  words,  to  create  utili- 
ties which  did  not  before  exist.  Consumption 
is  the  destruction  of  utilities  in  such  a  man- 
ner that  the  satisfaction  which  the  commodity 
was  able  to  produce  is  actually  experienced. 
The  test  of  consumption  is  the  degree  of 
satisfaction  obtained.  It  is  obviously  an  error 
to  look  upon  the  creation  of  new  utilities  as  a 


78  ECONOMICS 

test  of  consumption,  and  to  condemn  all  con- 
sumption from  which  there  does  not  emerge 
a  greater  number  of  utilities  than  is  de- 
stroyed. A  destruction  of  utilities  from  which 
new  utilities  emerge,  is,  strictly,  not  consump- 
tion at  all,  but  one  form  of  production.  The 
shoemaker,  it  is  said,  consumes  leather  in  the 
production  of  shoes.  But  the  utility  embodied 
in  the  leather  has  disappeared  in  the  one 
form  only  to  reappear  in  another.  It  has  not 
been  destroyed.  No  want  has  yet  been  satis- 
fied. Something  very  different  takes  place 
when  the  shoes  are  worn  out.  Here  the 
utilities  are  destroyed.  The  desire,  whether 
it  be  for  ornament  or  for  protection,  has  been 
satisfied.  Nothing  else  than  this  should  be 
called  consumption,  unless  some  qualifying 
word  is  added  to  indicate  the  meaning. 

We  may  use  the  term  "  productive  consump- 
tion" to  designate  the  transformation  of  utili- 
ties from  one  substance  to  another,  when  no 
desires  are  satisfied  in  the  process. 

Waste  is  a  destruction  of  utilities  from 
which  there  is  obtained  neither  new  utilities 
nor  the  intended  satisfaction.     Nearly  all  con- 


THE  CONSUMPTION  OF  GOODS  79 

sumption  involves  some  measure  of  waste, 
and,  though  to  a  less  extent,  the  productive 
process  too  is  accompanied  by  waste.  A  fail- 
ure to  create  the  greatest  number  of  utilities 
with  a  given  expenditure  of  energy,  must  be 
regarded  as  waste,  and  consequently  those 
forms  of  consumption  which  allow  existing 
productive  agencies  to  be  utilized  most  fully 
must  be  regarded  as  least  wasteful.  It  goes 
without  saying  that  it  lies  in  the  interests  of 
all  to  reduce  to  a  minimum  the  waste  in  each 
of  these  directions.  The  most  urgent  need  of 
all  is  for  greater  economy  in  consumption,  as 
will  appear  more  fully  in  subsequent  pages. 

Production  and  consumption  together  cover 
the  whole  field  of  man's  economic  activity. 
The  consumption  of  wealth^  is  uniformly 
accompanied  by  the  sensation  of  pleasure. 
The  degree  of  pleasure  varies  directly  with 
the  utility  of  the  commodity.  The  utility  is 
indeed  only  an  expression  of  the  possible  satis- 

1  Wealth  is  a  collective  term  including  all  kinds  of  commodi- 
ties. Anything  which  possesses  positive  utility,  as  defined  in 
the  next  paragraph,  is  wealth.  See  opening  paragraph  of 
Chapter  I. 


8o  ECONOMICS 

faction  to  be  derived  from  the  commodity. 
There  is  no  necessary  or  direct  connection 
between  the  effort  involved  in  the  production 
of  the  commodity  and  its  utility.  The  two 
may,  however,  be  directly  compared,  for  pro- 
duction always  involves  some  degree  of  pain^ 
or  subjective  cost,  which  is  a  sensation  di- 
rectly opposed  to  the  pleasure  obtained  from 
consumption.  The  whole  science  of  eco- 
nomics rests  upon  the  possibility  of  thus  com- 
paring pains,  or  subjective  costs  of  production, 
with  pleasures  obtained  as  a  result  of  eco- 
nomic activity. 

In  investigating  the  facts  concerning  con- 
sumption we  shall  early  find  some  among 
them  that  cannot  readily  be  reconciled  with 
the  simple  conception  of  utility  above  set 
forth :  viz.,  that  utility  is  the  power  of  satisfy- 
ing  desire   directly,    and   that   consumption   is 

1 "  Pain  "  is  the  word  commonly  used  as  the  name  of  the  sensa- 
tion opposed  to  pleasure,  though  there  are  objections  to  its  use, 
because  of  its  association  with  disease  or  other  abnormal  physi- 
cal conditions.  Subjective  cost  has  the  same  meaning.  The 
word  "  cost "  alone  is  used  in  this  sense  by  Cairnes  and  other 
writers.  As  so  used  the  word  "  cost "  must  not  be  confused 
with  money  costs.  It  means  the  actual  dis-utility  experienced  in 
production. 


THE  CONSUMPTION   OF  GOODS  8 1 

uniformly  accompanied  by  the  sensation  of 
pleasure.  It  will  be  found  that  certain  com- 
modities are  consumed  in  order  to  preserve 
life  or  to  restore  health,  though  they  confer 
no  immediate  pleasure.  Others  will  be  con- 
sumed because  they  are  essential  to  some 
pleasure  to  be  obtained  from  a  future  con- 
sumption. It  may  be  that  the  commodities, 
first  consumed,  which  are  in  rank  subordinate 
and  secondary,  confer  pain  rather  than  pleas- 
ure. In  estimating  the  pleasure  from  the 
second  commodity,  the  one  chiefly  concerned, 
it  is  necessary  to  make  a  deduction  for  the 
dis-utility  of  the  first,  before  a  just  estimate 
of  the  entire  consumption  is  possible. 

Any  commodity  which  is  essential  to  life 
may  be  said  to  possess  absolute  utility.  This 
kind  of  utility  cannot  be  economically  meas- 
ured. Any  commodity  which  is  consumed 
only  because  of  its  absolute  utility,  or  because 
its  consumption  is  required  for  the  sake  of 
some  other  pleasure,  may  be  said  to  have 
negative  utility,  or  dis-utility.  Commodities 
which  are  consumed  for  the  pleasure  which 
they  confer,  on  the  other  hand,  have  positive 


82  ECONOMICS 

Utility.  An  article  which  has  absolute  utility 
may  possess  also  positive  utility,  as  is  the  case 
usually  with  food;  or  it  may  be  neutral,  so 
that  no  economic  account  need  be  taken  of 
it,  —  as  with  air ;  or  it  may  have  dis-utility  of 
which,  again,  account  must  be  taken  as  a 
deduction,  from  the  pleasure  enjoyed  from 
consumption.  This  would  be  true,  for  in- 
stance, of  torn  or  ill-fitting  garments  which 
we  were  compelled  to  wear  in  the  absence  of 
suitable  clothing,  or  of  the  consumption  of 
disagreeable  medicine.^ 

It  should  be  pointed  out  that  utility  must 
often  pass  through  several  steps  before  it 
reaches  the  desire  to  which  it  corresponds.^ 
The   leather   of   which  shoes  are  to  be  made 

1  Absolute  utility  is  the  satisfaction  of  mere  living.  Positive 
utilities  refer  not  to  life,  but  to  the  content  of  life;  they  are  the 
sum  of  satisfaction  that  can  be  added  to  bare  living.  Negative 
utilities  are  the  pains  that  detract  from  the  pleasure  of  living.  A 
man  may  have  the  absolute  utility  of  life,  yet  he  may  suffer  all 
kinds  of  pain  and  be  on  the  point  of  suicide.  Every  life  con- 
tains the  absolute  utility  of  living  plus  certain  positive  utilities  or 
pleasures,  minus  certain  negative  utilities  or  pains.  —  Patten, 
Dynamic  Economics,  p.  40. 

2  A  fertilizer  is  useful  to  enrich  a  meadow;  the  meadow  is 
useful  to  produce  hay;  hay  is  useful  to  feed  horses;  and  horses 


THE  CONSUMPTION  OF  GOODS  83 

possesses  a  mediate  or  indirect,  though  it  is 
clearly  a  positive,  utility.  The  desire  for  pro- 
tection for  the  feet  cannot  be  met  until  a  further 
act  of  production,  the  transformation  of  the 
leather  into  shoes,  has  taken  place.  The  satis- 
faction of  the  desire  involves  a  long  industrial 
process  which  is  partially  completed  when  the 
leather  is  produced.  In  the  strict  sense  no  util- 
ity has  yet  been  produced ;  but  for  convenience 
in  rewarding  the  efforts  of  producers  the  indus- 
trial process  is  divided  into  distinct  operations, 
and  at  the  end  of  each  a  utility  is  said  to  have 
been  created.  A  utility  is  attributed  to  the  un- 
finished product,  derived  from  the  anticipated 
utility  of  the  commodity  into  the  production  of 
which  it  is  to  enter.  It  will  be  less  than  the 
utility  of  that'  commodity,  because  time  must 
elapse  and  further  productive  effort  be  ex- 
pended before  its  transformation  is  complete.^ 
But  all  commodities  find  their  ultimate  goal 

are  useful  to  do  service.  From  the  fertilizer  to  the  man  are 
several  steps,  but  it  is  the  final  step  which  makes  all  the  others 
count,  —  Gregory,  Political  Economy. 

1  Compare  the  distinction  made  in  Chapter  XIII.  between 
future  and  present  goods.  From  the  study  of  consumption  all 
consideration  of  future  goods  is  excluded,  since  it  is  only  present 


84  ECONOMICS 

in  ministering  to  human  wants.  The  whole 
material  environment  is  a  vast  aggregate  of 
useful  things,  the  power  of  which  to  yield  posi- 
tive utility  grows  steadily  greater.  The  natural 
forces  remain  constant,  but  man's  control  over 
them  increases  with  invention  and  social  prog- 
ress. Every  new  capacity  for  enjoyment  finds 
existing  the  necessary  physical  conditions  to 
provide  for  it.  Because  man's  industry  is  not 
adapted  to  those  conditions,  and  because  the 
pleasures  are  not  selected  in  the  order  indicated 
by  the  economic  conditions,  the  possible  utilities 
are  not  realized,  and  the  pain  involved  in  secur- 
ing those  which  are  realized  remains  dispropor- 
tionately intense.  To  society  as  a  whole  the 
environment  is  capable  of  yielding  utilities  in- 
finite in  number  and  of  infinite  variety.  The 
limitations  actually  experienced  are  to  be  traced 
to  subjective  causes. 

'  The  individual  is  restricted  in  his  choice  of 
utilities  by  the  expense  which  he  must  undergo 
to  secure   them  and  by  the  amount  of  time  at 

goods  that  can  be  consumed.  Future  goods  may,  of  course,  be 
"  productively  consumed,"  or  they  may  be  destroyed  through 
waste. 


THE  CONSUMPTION  OF  GOODS  85 

his  disposal  for  their  enjoyment.  Certain  com- 
modities are  absolutely  excluded  by  reason  of 
their  cost.  From  those  which  remain  he  chooses 
first  that  one  which  yields  the  largest  surplus 
of  utility  over  the  cost  involved  in  securing  it, 
and  then  other  commodities  in  the  order  of  the 
surplus  utility  which  they  yield.  This  is  the 
true  economic  order  of  consumption.  It  differs 
from  the  natural  order,  by  which  is  meant  the 
order  in  which  commodities  would  be  chosen, 
if  they  were  entirely  free.  Those  commodities 
which  have  a  large  surplus  of  utility  over  cost 
would  be  chosen,  in  the  economic  order,  before 
others  with  a  higher  total  utility  but  lower  cost. 
If  we  consider  the  various  single  commodi- 
ties chosen  as  made  up  of  a  succession  of  in- 
crements, each  corresponding  to  the  same  unit 
of  expenditure,  we  shall  find  that  those  incre- 
ments are  not  possessed  of  uniform  utility. 
The  first  increment  of  any  commodity  will  have 
a  maximum  utility.  The  succeeding  increments 
will  steadily  diminish  in  utility  until,  when  the 
desire  for  the  commodity  in  question  is  entirely 
satisfied,  an  increment  is  reached  of  which  the 
utility    is    zero.      Long    before    this    point    is 


S6  ECONOMICS 

reached,  however,  a  second  commodity  will  have 
been  chosen,  the  first  increment  of  which  has  a 
utility  perhaps  nearly  as  great  as  the  highest 
increment  of  the  first  commodity.  The  suc- 
ceeding increments  of  this  second  commodity 
diminish  in  utility  as  did  those  of  the  first. 
This  experience  is  repeated  with  a  third  and 
fourth  commodity,  in  each  case  the  utility  of  the 
highest  increment  ranging  between  the  highest 
and  the  lowest  increment  of  the  next  preceding 
commodity,  tending  generally  to  approach  the 
higher.  In  some  instances  it  may  even  be  quite 
as  great,  since  the  pleasure  afforded  by  the  first 
increment  of  two  commodities  may  balance, 
and  it  might  thus  become  a  matter  of  indiffer- 
ence which  should  be  chosen  first. 

This  law  of  diminishing  utility  may  be  ex- 
pressed arithmetically  by  the  erection  of  a  scale 
of  diminishing  utilities.  The  various  commodi- 
ties are  represented  by  the  letters  A,  B,  C,  D, 
etc.,  in  the  order  in  which  they  are  chosen  by 
the  consumer.  If  the  first  increment  A  yields 
a  utility  of  ten  units,  its  succeeding  increments 
may  be  represented  as  diminishing  uniformly 
in   utility  until  of  the.  eleventh  or  final  incre- 


THE  CONSUMPTION  OF  GOODS  8/ 

ment  the  utility  is  zero.  The  first  increment 
of  B  yields,  it  may  be,  but  eights  units  ;  the  first 
increment  of  C,  six  units ;  and  the  first  incre- 
ment of  D,  three  units.  If  we  assume  for 
convenience  that  there  are  only  these  four  com- 
modities from  which  to  choose,  the  various 
increments,  each  designated  by  the  number 
expressing  its  utility,  may  be  arranged  as  fol- 
lows in  the  order  in  which  they  are  chosen 
lo  A,  9  A,  8  A,  8  B,  7  A,  7  B,  6  A,  6  B,  6  C, 
5  A,  5  B,  5  C,  4  A,  4  B,  4  C,  3  A,  3  B,  3  C, 
3  D,  2  A,  2  B,  2  C,  2  D,  I  A,  I  B,  I  C,  I  D. 
This  is  the  so-called  scale  of  diminishing  utili- 
ties. It  is  generally  arranged  in  the  following 
form: 

A  B  C  D 

lO 

9 

8  8 

7  7 

6  6  6 

5  S  5 

4  4  4 

3  3  3  3 

2  2  2  2 

1  I  I  I 

o  o  o  o 


88  ECONOMICS 

The  numbers  arranged  under  the  letters 
which  designate  the  commodities  represent 
the  succeeding  increments  of  those  commodi- 
ties. Three  increments  of  A  (lO,  9,  and  8)  will 
be  desired  before  any  of  the  others.  Five 
increments  of  A  and  three  of  B  will  be  con- 
sumed before  any  of  C  or  D,  and  so  on.  If 
each  increment  represents  what  can  be  secured 
by  one  hour's  labor,  and  A  stands  for  food,  B 
for  clothing,  C  for  shelter,  and  D  for  ornament, 
the  scale  would  express  the  following  facts : 
that  two  hours'  labor  would  be  devoted  to  the 
production  (or  securing  possession)  of  food 
before  any  other  commodity  could  be  consid- 
ered. That  the  third  hour  would  produce  an 
equal  utility  whether  devoted  to  clothing  or 
food,  so  that  half  of  it  would  probably  be 
given  to  each.  That  it  would  be  only  after  six 
hours'  labor,  of  which  four  had  been  given  to 
food  and  two  to  clothing,  that  sufficient  pleasure 
could  be  derived  from  shelter  to  furnish  an 
inducement  to  devote  a  portion  of  the  time  to 
the  task  of  securing  shelter.  The  correspond- 
ing numbers  in  the  different  columns  represent 
different  utilities,  equal  in  amount  and  equally 


THE  CONSUMPTION  OF  GOODS  89 

difficult  of  acquisition.  If  each  separate  desire 
could  be  completely  satisfied,  it  would  be  found 
that  ten  increments  of  A,  eight  of  B,  six  of  C, 
and  three  of  D  had  been  consumed. 

The  idea  of  utility,  developed  at  length  in 
the  preceding  paragraphs,  has  been  introduced 
into  recent  economic  discussions  as  a  basis  for 
the  theory  of  value.  In  a  later  chapter  on 
the  subject  of  value  the  relations  between 
value  and  utility  will  be  examined,  but  there 
are  first  to  be  made  other  and  more  funda- 
mental applications  of  the  conception  of  utility 
within  the  field  of  consumption.^  The  study  of 
consumption,  like  that  of  production,  is  wholly 
independent  of  considerations  drawn  from  the 
theory  of  value.  But  consumption  is  vitally  de- 
pendent on  utilities.  When  the  available  utili- 
ties are   increased,  consumption   is   improved ; 

1  One  of  the  first  things  the  student  of  economics  learns 
is  that  the  end  of  economic  action  is  the  creation  of  "  utili- 
ties." .  ,  .  But  unfortunately  for  the  student,  he  is,  as  a  rule, 
no  sooner  introduced  to  this  lofty  conception  than  he  is  hurried 
past  it  by  the  necessity  of  measuring  the  results  of  economic 
action.  Without  much  warning,  the  wide  word  "  utility  "  is  put 
aside  in  favor  of  the  word  "  value."  .  .  .  All  the  while  the  last 
word  in  political  economy  is  not  value,  but  utility.  —  William 
Smart,  in  Annals  of  the  American  Academy,  Vol.  III.,  p.  257. 


90 


ECONOMICS 


when  they  are  lessened,  consumption  suffers. 
If,  with  comparatively  little  effort,  society  finds 
itself  able  to  satisfy  very  completely  all  its 
lower  as  well  as  its  higher  desires,  the  economic 
statement  of  that  fact  is  that  there  is  a  large 
surplus  of  utilities  over  costs.  It  is  immaterial 
to  society  as  a  whole  whether  these  utilities 
have  ** values"  or  not.  If  they  are  produced 
with  so  much  ease  and  in  so  great  quantities 
that  they  become  free  goods,  they  do  not  on 
that  account  contribute  less  to  the  comfort  and 
happiness  of  man.  The  theory  of  consumption, 
therefore,  entirely  disregards  alike  "  market " 
and  *' normal"  and  even  "subjective"  values, 
concerning  itself  with  an  investigation  of  the 
pleasure-giving  entities  which  we  call  utilities. 
This  distinction  is  one  which  should  be 
clearly  seen.  No  commodity  can  have  a  value 
unless  it  can  be  appropriated.  But  many  goods 
which  are  not  appropriated  have  great  utility. 
In  the  theory  of  value  it  is  of  prime  importance 
that  the  commodities  be  fitted  for  ownership, 
that  the  ownership  be  transferable  from  one 
person  to  another.  But  the  theory  of  con- 
sumption and   of    prosperity  and   of   progress 


THE  CONSUMPTION  OF  GOODS  9 1 

must  take  account  of  goods  not  thus  suited 
to  private  or  even  public  ownership.  Free 
goods,  non-appropriated  goods,  are  consumed, 
and  they  must  be  taken  account  of  when  a 
general  estimate  of  the  prosperity  of  a  commu- 
nity is  to  be  formed. 

The  true  starting-point  in  the  construction 
of  any  complete  theory  of  economics  lies  in 
consumption  rather  than  in  production.  Pleas- 
ures and  pains,  rather  than  physical  forces, 
are  the  initial  and  fundamental  economic  facts. 
Wants  precede  satisfactions.  The  study  of 
human  wants,  not  merely  in  the  abstract  man- 
ner so  common  in  theories  of  morals,  but  in 
the  concrete  manner  made  possible  by  the 
introduction  of  economic-  measurements,  may 
be  carried  on  independently  of  and  prior  to 
the  study  of  the  productive  agencies.  This 
order  of  development  is  not  only  possible,  it 
is  the  more  logical  and  fruitful.  The  one  who 
looks  upon  every  step  forward  in  social  prog- 
ress as  a  "  development  of  new  activities 
giving  rise  to  new  wants,"  ^  who  sees  the 
obstacles   to  progress  mainly  in  certain  physi- 

1  Marshall,  Principles  of  Economics^  Vol.  I.,  p.  147,  2d  ed. 


92  ECONOMICS 

cal  hindrances  to  the  development  of  industrial 
activity,  will,  if  he  construct  a  theory  of  prog- 
ress and  of  economics,  base  it  upon  different 
premises  and  formulate  it  in  different  terms 
from  those  employed  by  the  economist  who 
holds  that  the  environment  which  men  find  "  de- 
pends upon  their  mental  characteristics,"  ^  who 
looks  upon  every  step  forward  primarily  as  a 
modification  of  men's  desires  and  ideals,  who  in- 
sists that  economic  activity  at  any  particular 
point  will  always  be  determined  by  the  ideals  to 
which  man  has  already  attained,  the  initial  step 
in  further  development  being  an  advance  in 
man's  ideals,  a  modification  of  the  psychical  con- 
ditions of  wealth  production  which  have  their 
origin  in  the  prevailing  consumption.  The  re- 
sults of  progress  from  this  latter  standpoint  will 
be  sought  mainly  in  man  himself,  in  the  devel- 
opment, for  example,  of  new  tastes  which  allow  a 
fuller  exploitation  of  the  natural  resources.  All 
social  progress  and  activity  may  thus  be  viewed 
from  the  industrial  standpoint  of  production  or 
from  the  economic  standpoint  of  consumption. 

1  Patten,  Dynamic  Economics,  p,  38. 


CHAPTER  VI 

PROPOSITIONS   CONCERNING   CONSUMPTION 

The  economic  order  of  cojtstimption  is  modified 
by  changes  in  the  relative  cost  of  producing  dif- 
ferent commodities.  It  has  been  pointed  out  in 
the  preceding  chapter  that  commodities  are 
chosen  not  in  the  order  of  their  positive 
utility,  but  in  the  order  of  their  surplus  of 
utility  over  cost.  Any  modifications  in  the 
productive  processes,  therefore,  which  affect 
the  costs  of  producing  certain  commodities 
more  than  the  cost  of  producing  others,  since 
they  affect  the  surplus  of  utility,  must  modify 
the  economic  order.  This  modification  is  inde- 
pendent of  any  changes  in  the  positive  utility 
of  the  commodities.  The  construction  of  a 
railroad  will  cheapen  the  production  of  a  mul- 
titude of  commodities,  but  will  affect  those 
produced  at  greater  distances  more  than  those 
produced  near  at  hand.  If  it  affected  all  alike, 
it  could  not  modify  consumption.  It  does  not 
93 


94  ECONOMICS 

increase  the  utility  of  the  commodities  pro- 
duced at  a  distance,  but  it  increases  their 
relative  surplus  by  lowering  their  relative  cost. 
If  for  any  reason  costs  are  increased,  but  not 
uniformly,  a  similar  modification  takes  place. 
Taxation  never  affects  the  cost  of  all  com- 
modities alike.  It  therefore  influences  con- 
sumption, leaving  the  surplus  larger  on  certain 
commodities  than  on  others.  The  immediate 
effect  of  such  modifications  may  be  an  increase 
or  a  decrease  in  the  variety  of  consumption.  A 
cold  climate  adds  to  the  cost  of  producing  all 
kinds  of  food  which  are  to  be  met  with  in  tropi- 
cal climates.  But  it  increases  the  cost  of 
securing  fruit  more  than  that  of  producing 
meat.  In  the  warm  climate  there  is  a  much 
greater  surplus  in  fruit  than  in  meat.  The 
colder  climate  diminishes  the  surplus  in  each 
case  by  increasing  the  cost,  but  diminishes  the 
meat  surplus  less  than  it  does  the  fruit  surplus. 
Under  these  circumstances  it  will  be  easier  to 
increase  the  variety  of  consumption,  since  there 
will  be  almost  or  quite  as  much  inducement  to 
produce  the  one  as  the  other.^ 

,       1  Patten,  Consumption  of  Wealthy  p.  47. 


PROPOSITIONS  CONCERNING  CONSUMPTION       95 

The  ecofiomic  order  of  consumption  is  modified 
by  changes  in  appetites.  Progress  from  primi- 
tive to  advanced  stages  involves  a  decrease  in 
the  intensity  of  the  appetite  for  food,  and  par- 
ticularly for  the  few  varieties  of  food  and  drink 
which  are  so  eagerly  desired  by  human  beings 
on  a  low  plane  of  civilization.  The  first  reason 
for  the  greater  intensity  of  appetite  under 
primitive  condition  is  the  irregularity  of  the 
food  supply.  The  appetite  must  be  stronger, 
the  capacity  for  food  greater,  when  periods  of 
scarcity  succeed  those  of  plenty.  When  food 
is  regularly  supplied,  the  need  for  the  more 
intense  appetite  disappears.  The  few  articles 
of  which  the  diet  of  primitive  man  is  composed 
contain  necessarily  all  the  food  elements  essen- 
tial to  the  system ;  but  while  rich  in  some  of 
these  elements,  they  are  poor  in  others.  An 
increase  of  variety,  if  it  adds  to  the  diet  articles 
which  contain  larger  proportions  of  those  ele- 
ments which  are  present  in  the  earlier  articles 
only  in  small  quantities,  will  result  in  a  further 
decrease  of  appetite.  If  one  eats  only  meat,  it 
is  necessary  to  consume  larger  quantities  in 
order  to  get  a  sufficient  amount  of  starch  and 


96  ECONOMICS 

Other  elements  demanded  by  the  system;  but 
if  corn  and  potatoes  are  added  to  the  diet,  the 
needs '  of  the  system  for  these  particular  ele- 
ments are  much  more  quickly  supplied,  fewer 
pounds  of  food  need  to  be  taken  when  the  diet 
is  thus  varied,  and  the  appetite  is  correspond- 
ingly reduced. 

Improvements  in  shelter  and  in  clothing 
lessen  materially  the  demand  of  the  system 
for  food,  as  a  source  of  animal  heat,  the 
effect  of  which  may  be  seen  in  the  decrease 
of  appetite ;  and  finally  the  tendency  is  still 
further  strengthened  by  the  introduction  of 
machinery  and  mechanical  devices  which  re- 
lieve the  system  of  the  muscular  strain  in- 
volved in  heavy  manual  labor.^  A  reduction 
of  appetite  for  food  has  followed  each  of 
these  changes,  but  it  has  shown  itself  much 
more  with  some  commodities  than  with  others. 
A  measure  of  disgust  becomes  associated  with 
the  thought  of   eating  the  very  kinds  of  food 

1  Professor  Marshall  speaks  of  the  effects  of  machinery  in 
relieving  that  "  excessive  nauscular  strain  which  a  few  genera- 
tions ago  was  the  common  lot  of  more  than  half  the  working- 
men  even  in  such  a  country  as  England." 


PROPOSITIONS  CONCERNING  CONSUMPTION       97 

that  once  gave,  and  if  the  older  conditions 
were  restored  would  again  give,  the  keenest 
pleasure.  These  changes  in  appetite  modify 
the  economic  order  of  consumption  by  act- 
ing not  on  the  cost,  but  on  the  utility.  Cost 
may  remain  the  same,  but  surplus  utility  is 
reduced  because  total  utility  is  reduced.  Since 
the  utility  is  not  reduced  on  other  commodi- 
ties as  it  is  on  food,  and  since  it  is  not  uni- 
formly reduced  on  all  kinds  of  food,  the 
order  in  which  commodities  are  desired  is 
changed.  The  economic  order  of  consumption 
is  therefore  modified  by  any  changes  in  appetite. 
Increase  in  variety  modifies  the  economic 
order  of  consumption  by  lessening  the  negative 
utilities.  As  the  consumption  becomes  more 
varied,  and  the  appetite  for  the  few  com- 
modities less  intense,  greater  harmony  is  in- 
troduced into  the  consumption,  and  the  relative 
number  of  commodities  which  yield  positive 
utility  is  greatly  increased.  Under  primitive 
conditions  those  commodities  which  have  ab- 
solute utility,  or  life-sustaining  power,  must 
be  preferred  to  those  which,  if  the  cost  were 
not  too  high,  would  be  chosen  on    account   of 

H 


98  ECONOMICS 

the  pleasure  which  they  are  capable  of  giv- 
ing ;  but  all  the  productive  energies  must  be 
concentrated  upon  the  absolute  utilities.  The 
absolute  utilities  are  chosen  of  necessity,  even 
though  they  are  also  negative  rather  than 
positive  utilities.  It  is  gradually  discovered, 
however,  that  for  these  negative  utilities 
others  may  be  substituted  which  are  both 
absolute  and  positive  utilities.  Food  is  dis- 
covered which  is  capable  of  both  yielding 
pleasure  and  sustaining  life.  Articles  of  fur- 
niture are  invented  which  please  by  their 
appearance  and  serve  the  same  purposes  as 
the  cruder  and  clumsier  furniture  first  in- 
vented. Dress  becomes  beautiful  and  com- 
fortable as  well  as  fitted  to  protect  from  heat 
and  cold.  Those  commodities  which  are  neu- 
tral or  negative  as  to  their  utility  are  dis- 
placed continually  in  a  progressive  society 
by  others  which  have  absolute  utility,  as  did 
the  first,  but  positive  utility  as  well.  This 
gradual  elimination  of  negative  and  neutral 
utilities  is  one  of  the  chief  modifications  to 
be  observed  in  the  economic  order  of  con- 
sumption. 


PROPOSITIONS  CONCERNING  CONSUMPTION       99 

The  pleasure  derived  from  the  consumption 
of  a  given  nu^nber  of  commodities  is  increased 
when  combinations  of  compleme?itary  goods  are 
formed.  It  is  possible  that  two  commodities, 
both  possessing  positive  utility,  may,  when 
consumed  together,  enter  into  such  relation 
with  each  other  as  to  yield  a  utility  greater 
than  the  sum  of  the  separate  utilities.  Sugar 
and  fruit  eaten  together  form  such  a  com- 
plement, since  the  one  renders  the  other 
palatable,  while  neither,  perhaps,  would  be 
eaten  if  they  could  not  be  eaten  together. 
A  saddle  has  positive  utility  only  when  there 
is  a  horse  with  which  it  can  be  used.  The 
utility  of  the  whole  complement  is  a  positive 
quantity  which  cannot  be  ascertained  by  add- 
ing the  separate  utilities  of  the  separate  com- 
modities of  which  it  is  composed.  The  utility 
of  a  picture  may  be  very  greatly  increased 
by  changing  its  relation  to  other  objects  in 
the  same  room.  The  utility  of  a  group, 
which  is  necessary  to  the  satisfaction  of  a 
given  desire,  may  be  continually  modified  by 
substituting  for  some  one  element  in  it  an- 
other commodity  which  has  of  itself  no  greater 


100  ECONOMICS 

utility,  but  which  harmonizes  better  with  the 
other  elements  of  the  group.  If  commodities 
are  consumed  in  a  haphazard  way,  without 
regard  to  their  relations  to  each  other,  a  large 
part  of  their  possible  utility  is  lost.  If  the 
consumer  fails  to  grasp  new  opportunities  to 
substitute  for  the  inharmonious  elements  others 
which  would  as  well  answer  the  individual 
needs  in  question,  and  at  the  same  time  fit 
more  harmoniously  into  the  general  consump- 
tion, he  is  compelled  to  retain  in  his  con- 
sumption the  cruder  and  more  primitive 
groups  of  commodities,  and  thereby  sacrifices 
a  pleasure  which  could  have  been  obtained 
without  additional  effort  or  cost.  Normal 
economic  consumption  is  distinguished  from 
primitive  consumption  more  by  this  difference 
than  by  any  other. 

Pleasure  is  lessened  by  the  forced  combination 
of  discordant  utilities.  Progress  lies  in  the 
direction  of  forming  the  kind  of  groups  indi- 
cated in  the  preceding  paragraph.  The  natural 
group  is  not  that  which  happens  first  to  have 
been  formed  by  primitive  beings,  but  the  one 
in  which  the  elements  unite  with  the  least  loss 


PROPOSITIONS  CONCERNING  CONSUMPTION      10 1 

of  utility.  Unnatural  and  discordant  groups 
are  formed  because  of  ignorance  of  the  rela- 
tions between  them,  or  because,  from  habit,  the 
old  commodities  are  retained  long  after  the 
time  when,  by  a  change  in  the  methods  of 
production  or  in  the  conditions  of  life,  there 
has  been  made  possible  a  new  and  better  com- 
bination. 

It  can  be  scientifically  demonstrated  that  the 
consumption  of  highly  flavored  food,  or  rich 
pastry,  or  tobacco,  is  highly  incompatible  with 
the  greatest  pleasure  from  a  healthful  and  nu- 
tritious diet ;  but  this  fact,  if  popularly  known, 
is  at  least  not  realized  with  sufficient  vividness 
to  control  the  actions  of  even  the  majority  of 
persons.  Forced  and  discordant  combinations 
are  made  which  are  injurious  to  the  system, 
and  which  not  only  lessen  possible  pleasure, 
but  often  produce  much  suffering.  Possible 
positive  utility  is  thus  transformed  by  unwise 
consumption  into  negative  utility.  Artists  are 
able  to  point  out  innumerable  popular  errors 
in,  the  combinations  of  colors  which  are  made 
in  dress  and  in  house  ornamentation,  yet,  be- 
cause of  the  popular  ignorance  on  these  mat- 


102  ECONOMICS 

ters,  inharmonious  combinations  are  retained, 
and  the  possible  pleasure  is  not  realized.  Taste 
for  good  literature  is  destroyed  by  the  perusal 
of  trashy  stories.  In  other  words,  the  two 
kinds  of  literature  are  not  complementary,  but 
discordant.  On  the  other  hand,  a  perusal  of 
good  fiction  or  of  poetry  may  increase  the 
pleasure  which  the  reader  subsequently  ob- 
tains from  the  study  of  history,  and  may  not 
be  incompatible  with  the  study  of  scientific 
treatises.  The  whole  complement  literature 
yields  a  pleasure  which  may  be  regarded  as  a 
unit.  The  utility  of  the  commodity  literature 
will  be  less  if  the  elements  which  compose  it 
are  discordant,  and  will  be  greater  in  propor- 
tion as  they  form  a  harmonious  complement. 

The  economic  order  of  consjimption  is  modified 
by  the  m,ental  act  by  which  the  increase  of  utility 
is  imputed^  i.e.y  attributed  to  the  various  ele- 
ments  which  compose  the  group.  The  pleasure 
from  a  complement  of  commodities  is  a  unit, 
but  the  complement  itself  is  complex.  Each  of 
the  commodities  will  be  recognized  to  have  con- 
tributed at  least  that  amount  of  utility  which 
it  would  have  had  if  consumed  in  isolation ;  but 


PROPOSITIONS  CONCERNING  CONSUMPTION      103 

after  all  the  commodities  have  had  that  amount 
assigned  them,  there  will  remain  all  the  in- 
crease of  utility  which  results  from  the  forma- 
tion of  the  complement.  This  increase  is  not, 
as  might  at  first  be  expected,  distributed  evenly 
or  in  proportion  to  the  original  utility  of  the 
commodities.  On  the  contrary,  there  is  always 
a  tendency  to  concentrate  the  whole  of  the 
increase  on  that  one  element  or  on  the  limited 
number  of  elements  which  have  been  last 
added  to  the  complement,  and  which  are  there- 
fore looked  upon  as  having  completed  it,  and 
thus  added  to  the  utility  of  all  the  other  mem- 
bers of  the  group.  At  a  dinner,  for  instance, 
the  agreeable  result  of  the  meal  as  a  whole  is 
apt  to  be  attributed  to  some  new  or  favorite 
dish,  the  absence  of  which,  though  the  dish  has 
of  itself  no  great  utility,  would  spoil  the  entire 
meal.  In  an  academic  course  the  student  is 
always  inclined  to  account  for  the  benefit  which 
he  knows  that  he  has  received  from  the  course, 
by  referring  to  the  instruction  of  a  favorite 
teacher.  At  a  concert  the  listener  will  attrib- 
ute to  some  special  performance  the  pleasure 
afforded  by  the  entire  programme.      This  act 


104  ECONOMICS 

of  imputation  is  a  mental  act.  The  principle, 
in  accordance  with  which  the  utilities  of  certain 
commodities  are  increased,  because  of  their 
relation  to  other  commodities  in  the  group  of 
which  they  form  a  part,  is  a  psychological 
principle.  Commodities  are  desired  in  a  differ- 
ent order  because  the  utility  of  certain  com- 
modities is  thus  increased.  The  economic  order 
of  consumption  is  modified,  therefore,  by  the 
imputation  of  utility. 

The  final  incremeftts  of  the  different  commodi- 
ties consumed  tend  to  rise  and  fall  together. 
Attention  has  already  been  called  to  the  fact 
that  commodities  are  consumed  in  a  certain 
order,  and  that  the  successive  increments  of 
each  commodity  satisfy  wants  of  steadily  dimin- 
ishing intensity.  By  the  final  increment  of  any 
commodity  is  meant  the  last  increment  actually 
consumed.  By  the  marginal  increment  of  con- 
sumption is  meant  the  final  increment  of  the 
last  commodity  added  to  the  consumption.  It 
might  be  supposed  that  this  marginal  increment 
would  satisfy  a  much  lower  desire  than  the  final 
increments  of  the  commodities  which  have  pre- 
cedence in  the  economic  order.     If  it  were  a 


PROPOSITIONS  CONCERNING  CONSUMPTION      105 

question  of  the  initial  increments  of  each  com- 
modity instead  of  the  final  increments,  there 
would  be  such  a  difference.  But  the  final  incre- 
ment of  this  last  commodity  has  as  great,  or 
nearly  as  great,  utility  as  the  final  increments  of 
any  of  the  preceding  commodities.  The  differ- 
ences in  the  pleasure  obtained  from  different 
commodities  are  to  be  found,  not  in  their  final, 
but  in  their  earlier  increments.  At  the  point 
where  the  consumption  is  broken  off  they  have 
about  equal  power  of  conferring  pleasure  ;  other- 
wise the  consumer  would  transfer  a  portion  of 
his  expenditure  from  the  commodity  which  gave 
less  pleasure,  to  one  which  gave  more.  In  this 
way  a  more  intense  want  for  the  first  commod- 
ity would  be  left  as  the  final  want,  and  a  less 
intense  want  for  the  second  commodity  would 
be  satisfied.  For  instance,  food  to  the  starving, 
shelter  to  the  homeless,  crowd  out  all  other 
thoughts;  but,  with  a  dollar  to  spare,  a  man 
may  hesitate  whether  to  indulge  in  a  joint  of 
beef,  to  have  a  broken  window-pane  set,  or  to 
buy  Lorna  Doone  and  read  it  to  his  family.  It 
might  happen  that  radical  changes  in  the  desires 
of  a  consumer  would  leave  his  consumption  tem- 


io6 

ECONOMICS 

porarily  in  the  condition  indicated  hy- 
ing scale : 

the  f ollow- 

ABC 

D 

E 

F 

G 

H 

I      J       K 

9 
8                  8 

9 
8 

9 

8       8 

7        7        7 
6        6        6 

7 

7 
6 

7 
6 

6 

7       7        7 
6       6        6 

5        5 
4 

5 

5 

5 

5 
4 
3 

2 

5       5 

The"  final  increment  of  the  larger  number  of 
commodities  is  5.  But  there  are  three  com- 
modities, say  newspapers,  woollen  clothing,  and 
rocking  chairs  (C,  D,  and  K),  of  which  the  final 
increments  remain  6,  7,  and  6,  respectively; 
while  two  other  commodities,  say  house  accom- 
modation and  table  silver  (A  and  H),  satisfy 
their  respective  wants  so  fully  that  their  final  in- 
crements fall  in  utility  to  4  and  2.  This  unbal- 
anced condition  cannot  long  remain.  The  more 
intelligent  the  consumption,  the  more  quickly 
will  normal  conditions  be  restored.  A  slight 
reduction  in  house  rent,  and  a  considerable  re- 
trenchment in  the  expenditure  for  table  silver 
will  allow  a  daily  newspaper  to  take  the  place 


PROPOSITIONS  CONCERNING  CONSUMPTION      10/ 

of  a  weekly ;  will  allow  a  more  adequate  supply 
of  woollen  clothing,  and  the  purchase  of  an  addi- 
tional rocking  chair.  This  readjustment  of  con- 
sumption to  the  conditions  brought  about  by 
the  growth  in  intensity  of  certain  desires,  as 
compared  with  others,  is  continually  in  progress. 
Its  tendency  is  to  cause  the  final  increments  of 
all  commodities  to  satisfy  wants  of  equal  inten- 
sity; in  other  words,  to  cause  the  final  incre- 
ments of  all  commodities  to  have  equal  degrees 
of  utility. 

The  margin  of  consumption  is  fixed  by  the  re- 
lation between  man  and  his  environment.  From 
the  preceding  discussion  it  will  be  seen  that  the 
margin  of  consumption  may  be  regarded  as  a 
straight  line,  or  one  continually  tending  to  be- 
come straight,  and  forming  the  boundary  line 
of  actual  consumption.  In  the  illustration  above 
given,  after  readjustment  is  complete,  the  mar- 
gin is  a  straight  horizontal  line  passing  below 
the  final  increments  of  the  commodities.  The 
margin  may  be  indicated  by  the  omission  of  the 
numbers  below  it,  as  in  the  preceding  illustra- 
tion, or  by  the  drawing  of  a  line,  as  in  the  fol- 
lowing illustration : 


I08  ECONOMICS 


ABCDEFGHI    JKLMNOPQR 

9    9  9 

8  8    8  8    8 

7    7    7    7    7    7  7    7    7 

6666666         666 

5    5    5    5    5    5    5    5    5    5    5 


444444444444  4 

3333333333333    3    3 

22222222222222222       2 
I       I       I       I       I      I       I       I       I      I       I      I       I       I       I       I       I        I 

ooooooooooooooooo     o 

All  commodities  have  a  definite  relation  to 
this  line,  their  successive  increments  ranging 
either  partly  above  and  partly  below  or  entirely 
below  it.  Of  commodities  which  begin  with 
a  very  high  degree  of  utility,  a  considerable 
number  of  increments  will  be  found  above  the 
margin,  i.e.,  a  considerable  quantity  of  the 
commodity  is  consumed;  of  others  but  few 
increments  are  above  the  margin  ;  while  still 
others,  and  always  vastly  the  greater  number 
of  commodities,  are,  for  the  man  of  moderate 
means,  entirely  below  the  margin.  They  may 
be  conceived  as  arranged  in  a  particular  way 
below  the  margin,  waiting,  as  it  were,  until  the 
margin  falls  far  enough  to  include  them,  and 


PROPOSITIONS  CONCERNING  CONSUMPTION      109 

certain  to  make  their  appearance  at  that  time 
in  accordance  with  a  definite  order,  the  eco- 
nomic order  of  consumption.^  What  is  the  rea- 
son for  the  changes  in  the  position  of  this  line, 
for  the  rise  or  fall  in  the  margin  of  consump- 
tion ?  The.  broadest  answer  is  that  it  is  fixed 
by  the  relation  existing  at  the  given  time  be- 
tween man  and  his  environment;  and  for  our 
present  purposes  this  answer  is  sufficiently 
accurate.  Man's  power  over  nature  is  indi- 
cated by  his  ability  to  utilize  more  efficiently 
the  natural  resources  in  the  satisfaction  of  his 
desires.  As  this  power  increases,  the  margin 
of  cousumption  falls.  With  each  step  in  indus- 
trial progress,  wants  of  less  and  less  intensity 
are  satisfied.  If  we  disregard  changes  in 
human  wants,^  a  fall  in  the  margin  of  consump- 
tion will  be  regarded  as  an  indication  of  prog- 
ress.    After  each  increase  in  the  variety,  and 

1  This  order  is  of  course  not  fixed  in  the  sense  that  it  is  in- 
capable of  modification.  The  object  of  this  entire  chapter  is  to 
show  that  it  is  continually  changing,  but  in  accordance  with 
principles  which  may  be  investigated  and  clearly  established. 

2  An  important  condition.  The  modification  of  conclusion 
necessary  on  taking  account  of  changes  in  wants  will  receive 
careful  attention  in  the  next  chapter. 


I  lO  ECONOMICS 

especially  after  the  addition  of  any  more  intense 
want,  there  will  be  a  renewed  effort  to  satisfy  the 
whole  range  of  wants  even  more  completely  than 
before.  The  margin  falls  in  exact  correspond- 
ence with  the  success  of  that  effort.  The 
margin  of  consumption  is  therefore  fixed  by  the 
relation  between  man  and  his  environment. 

The  law  of  progress,  so  far  as  it  affects  the 
consumption  of  the  individual^  is  that  the  mar- 
ginal increment  of  consumption  satisfies  at  each 
period  a  want  of  greater  intensity  than  at  the 
preceding  period.  There  are  two  opposite  ten- 
dencies :  one  toward  the  improvement  of  the 
mechanical  processes  of  production  springing 
from  industrial  progress ;  and  one  toward  the 
development  of  new  wants  springing  from 
social  progress.  The  latter  tendency  deter- 
mines the  extent  to  which  positive  utility  will 
be  found  to  reside  in  commodities  which  had 
before  been  regarded  as  neutral  or  negative, 
and  the  extent  to  which  the  positive  utilities  of 
other  commodities  will  be  increased  relatively 
to  their  cost.  In  a  progressive  society  this 
latter  tendency  will  prevail  over  the  other  in 
determining  the  actual  position  of  the  margin 


PROPOSITIONS  CONCERNING  CONSUMPTION      1 1 1 

of  consumption.  Although  the  margin  might 
fall  because  of  the  fact  that  with  a  given 
amount  of  energy  given  wants  are  more  fully 
satisfied,  it  is  prevented  from  doing  so  by  the 
growth  of  new  wants  and  by  changes  in  the 
relative  intensity  of  wants  that  had  previously 
existed.  Commodities  that  had  been  entirely 
below  the  margin  are  brought  above  it  by  the 
discovery  of  new  uses  to  which  they  may  be 
applied.  The  work  of  the  last  hour  of  the 
laborer's  day  satisfies  a  want  of  greater  inten- 
sity than  it  previously  did  because  of  these 
changes  in  desires.  If  wants  had  not  changed, 
that  hour  would  satisfy  a  less  intense  want  than 
it  formerly  did,  because,  each  of  the  previous 
hours  of  the  day  having  become  more  produc- 
tive, all  the  more  intense  wants  would  have 
been  already  satisfied  before  that  hour  had 
been  reached.  Temporarily  the  margin  may 
fall  immediately  after  great  changes  in  the  pro- 
ductive processes,  but  eventually,  if  there  is 
social  as  well  as  industrial  progress,  the  mar- 
gin will  rise,  the  law  of  progress  being  that 
the  marginal  increment  satisfies  continually  a 
higher  or  more  intense  want. 


CHAPTER  VII 

SOCIAL    PROSPERITY 

The  prosperity  of  society  is  measured  by  the 
surplus  utility  which  it  can  create  in  a  given 
time.  It  is  important  that  it  be  understood  just 
what  is  meant  by  surplus  as  the  term  is  here 
used.  It  is  the  designation  of  all  that  part  of 
utility  which  remains  after  the  costs  of  pro- 
ducers have  been  made  good.  It  is,  perhaps, 
easiest  to  see  that  the  manufacturer,  or  the 
farmer,  or  the  miner  has  left,  after  meeting  all 
his  expenses  of  production,  a  surplus  product. 
Assuming  that  the  manufacturer  himself  en- 
gages actively  in  the  production  as  manager  of 
the  industry  and  as  capitalist,  it  may  be  true 
that  he  does  not  have  a  surplus  on  every  incre- 
ment of  capital  which  he  invests,  or  on  every 
hour  during  which  he  labors.  If  we  admit  that 
the  fatigue  of  the  labor  which  extends  far 
into  the  night  is  so  great  that  the  return  only 
enables  the  manufacturer  to  regain  his  former 

112 


SOCIAL  PROSPERITY  II3 

position,  there  is  at  least  for  the  earlier  hours 
an  equal  or  a  greater  return,  and  there  is  there- 
fore a  surplus  on  the  labor  of  those  hours,  in- 
creasing in  amount  toward  the  earlier  hours  of 
the  day.  His  capital  may  be  arranged  likewise 
in  a  series  of  increments,  each  after  the  first 
bringing  in  a  smaller  return  than  the  increment 
preceding  it.^  Then  even  if  we  admit  that 
there  is  just  an  even  return  on  the  last  in- 
crement invested,  there  is  still  an  increasing 
surplus  on  the  preceding  increments  as  we 
approach  the  investment  which  is  most  pro- 
ductive. 

The  total  surplus  on  manufactured  gpods 
does  not  appear,  however,  in  the  profits  of  the 
manufacturer.  This  total  surplus  is  made  up 
in  part  of  items  which  enter  into  the  manufact- 
urer's expenses.  If  he  furnishes  a  part  of  the 
capital  and  is  part  owner  of  the  land  used  by 
the  industry,  he  is  at  one  and  the  same  time 
manufacturer,  capitalist,  laborer,  and  landlord, 
and  in  each  capacity  adds  something  to  the 
total  surplus.     But  those  parts  of  the  surplus 

1  Clark,  "  Distribution  as  Determined  by  a  Law  of  Rent,"  in 
Quarterly  Journal  of  Economics  for  January,  1892. 


1 14  ECONOMICS 

contributed  by  the  capital,  labor,  and  land  of 
other  persons  appear  on  the  manufacturer's 
accounts  as  items  of  expense.  It  is  precisely 
the  same  to  the  manufacturer,  so  far  as  the 
particular  transaction  is  concerned,  whether 
the  wages  paid  out  by  him  are  needed  by 
the  laborer  to  reimburse  actual  labor  costs,  or 
whether  they  are  partly  surplus  enjoyed  by  the 
laborer.  Thus,  the  surplus  incomes  enjoyed 
by  the  capitalist  who  loans  to  the  manufacturer, 
by  the  landlord  who  rents  his  land,  by  the  la- 
borer who  works  for  wages,  are  all  properly 
counted  as  expenses  of  manufacture,  but  they 
are  not  costs  to  society.  Before  we  can  deter- 
mine the  social  cost  of  a  given  quantity  of 
commodities,  we  must  trace  back  through  the 
complex  processes  of  production  the  actual 
productive  exertions  of  the  different  classes  of 
producers,  disregarding  the  expenses  of  him 
whom  we  call  the  manufacturer,  because  those 
expenses  are  made  up  of  many  items  which 
may  or  may  not  be  costs ;  but,  on  the  other 
hand,  counting  his  costs,  and  those  of  all  other 
producers. 

We  thus  ascertain  one  of  the  two  elements 


SOCIAL   PROSPERITY  II5 

necessary  to  a  correct  estimate  of  national  pros- 
perity. Over  against  this  cost  we  are  to  place 
the  other  element,  the  total  utility  of  the  com- 
modities produced.  The  difference  between 
these  is  the  social  surplus,  or  the  real  measure 
of  prosperity.  It  is  a  mistake  to  suppose  that 
this  social  surplus  can  be  increased  only  by 
methods  which  increase  both  costs  and  utilities, 
or  that  there  is  an  invariable  relation  between 
the  increase  of  utilities  and  the  increase  of 
costs.  At  any  given  time,  in  a  given  stage  of 
progress,  there  may  be  such  a  relation,  but  it  is 
modified  by  many  causes  which  are  continu- 
ously in  action.  Every  such  cause  that  modi- 
fies the  relation  favorably,  enabling  greater 
utility  to  be  produced  at  the  same  cost,  or  the 
same  utility  at  a  less  cost,  increases  the  social 
surplus.  Among  such  causes  may  be  named 
the  discoveries  which  place  the  natural  forces 
more  completely  at  the  disposal  of  society, 
the  accumulated  results  of  past  civilization,  in- 
herited capital  and  knowledge,  and  inherited 
industrial  qualities.^  The  fact  that  there  has 
been  such  a  change  in  the  relation  of  cost  to 

1  VdXiQUf  Dynamic  Economics ^  p.  51. 


Ii6 


ECONOMICS 


utility  has  been  frequently  obscured  by  the 
unequal  distribution  of  the  newly  created  utili- 
ties. Leaving  aside  for  the  present  all  con- 
sideration of  how  the  wealth  at  the  disposal 
of  society  is  distributed,  it  is  apparent  that  the 
social  utilities  are  vastly  increased  by  causes 
which  do  not  involve  any  increase  of  costs,  but 
rather  tend  to  lessen  them. 


B        B'       B' 


Fig.  I. 


Figure  I.  represents  the  social  utilities,  the 
total  number  of  pleasure-giving  commodities  at 
the  disposal  of  society  at  any  given  time.  It 
may  be  regarded  as  made  up  of  an  indefinite 


SOCIAL   PROSPERITY  11/ 

number  of  parallel  vertical  lines  like  AB,  A'B\ 
A"B",  .  .  .  DC,  diminishing  in  length  toward 
the  right.  This  figure  corresponds  to  the 
scale  of  diminishing  utilities  of  Chapter  V.,^ 
and  the  commodity  AB  may  be  assumed  to 
have  ten  units,  and  DC  eight  units,  all  other 
commodities  ranging  between  these  limits.  It 
will  be  noticed  that  the  number  of  commodities 
is  measured  by  the  length  of  the  line  BC,  the 
intensity  of  the  pleasure  conferred  by  the  length 
of  the  vertical  lines.  As  additional  commodi- 
ties are  consumed,  BC  is  lengthened,  and  new 
vertical  lines,  shorter  than  DC,  are  erected. 
The  scale  previously  given  represented  the 
consumption  of  an  individual  consumer,  while 
this  figure  represents  social  consumption.  In 
both  instances  commodities  are  arranged  in  the 
order  of  their  surplus  of  utility  over  the  expense 
to  the  consumer  of  securing  possession  of  them. 
Figure  II.  represents  the  social  costs  of  pro- 
ducing the  commodities  represented  in  Figure  I. 
The  line  BC  is  identical  in  the  two  figures, 
standing  in  each  case  for  quantity.  The  verti- 
cal lines  FB,  F'B\  .  .  .  EC  show  the  cost  of 
1  P.  87. 


ii8 


ECONOMICS 


producing  the  different  commodities.  They  do 
not  show  the  expense  to  consumers,  but  the 
actual  costs,  the  pains  of  production.  In  each 
figure  the  vertical  lines  represent  the  impres- 
sions made  on  the  feelings  of  human  beings, — 
in  Figure  I.,  the  feeling  of  pleasure  from  con- 
sumption ;  in  Figure  II.,  the  feeling  of  pain 
from  production.     The  vertical  lines  of  Figure 

E 


Fig.  II. 

II.  increase  in  length  toward  the  right,  because 
the  producer's  cost  steadily  increases  as  a  larger 
number  of  commodities  are  produced  in  a  given 
time.  Taking  the  day  as  the  unit,  it  is  suffi- 
ciently evident  that  the  pains  of  production 
steadily  increase  as  the  'length  of  the  day  is 
prolonged.  The  goods  first  produced  by  society 
have  the  greatest  utility,  they  have  also  the 
least  cost.     The  first  few  hours  of  labor  in  the 


SOCIAL  PROSPERITY 


119 


day  may  have  scarcely  any  actual  cost  to  the 
producer,  the  fifth  hour  becomes  burdensome  ; 
by  the  eighth  hour,  all  the  more  intense  wants 
being  satisfied,  and  the  fatigue  becoming  great, 
the  producer  doubts  whether  further  labor  will 
be  of  any  advantage;  and  by  the  ninth  hour, 
that  which  can  be  produced  having  compara- 
tively little  utility  and  entailing  heavy  cost,  pro- 
duction for  the  day  ceases. 
A 


Fig.  III. 

When  these  figures  are  combined  as  in  Figure 
III.,  the  resulting  surplus  is  clearly  shown. 
Even  the  earliest  utilities  are  represented  as 
having  a  certain  cost,  FB,  though  in  excep- 
tional cases  that  cost  might  disappear,  in  which 


I20  ECONOMICS 

cases  F  would  coincide  with  B\  and  even  the 
latest  utilities  are  represented  as  having  a  cer- 
tain surplus,  DEy  though  this  also  might  dis- 
appear, in  which  case  E  would  coincide  with  D, 
Now,  the  prosperity  of  society  is  indicated  by 
the  size  of  the  area  A  FED.  Prosperity  is  in- 
creased by  anything  which  increases  this  area. 
Errors  would  probably  be  made  if  it  were  at- 
tempted to  extend  the  vertical  lines  shown  in 
Figure  I.  through  the  cost  area  of  Figure  III. 
The  particular  commodity  of  which  the  cost  is 
FB  might  not  have  a  surplus  AF\  but  the  line 
BC  oi  Figure  III.,  like  the  corresponding  lines 
of  the  preceding  figures,  does  represent  all  com- 
modities, the  whole  area  ABCD  does  repre- 
sent their  utility,  and  that  part  of  this  area 
which  is  below  the  slanting  line  FE  represents 
their  cost.  The  object  of  the  discussion  on 
which  we  are  entering  will  be  better  understood 
if  the  relations  expressed  by  these  areas  are 
kept  constantly  in  mind.  Prosperity  is  increased 
either  by  increasing  the  area  of  the  quadrilateral 
AC^  or  by  lessening  that  part  of  it  which  makes 
lip  the  quadrilateral  FC. 

The   theory  of   prosperity  then  requires  an 


SOCIAL   PROSPERITY  121 

examination  of  the  various  means  by  which  the 
social  surphis  is  increased.  Those  means  relate 
either  to  the  increase  of  utilities  or  to  the  reduc- 
tion of  costs.  So  far  as  they  relate  to  the 
increase  of  utilities  they  may  be  classed  as  fol- 
lows :  increase  in  variety  of  consumption ;  sub- 
stitution of  positive  utilities  for  such  absolute 
utilities  as  had  been  negative  or  neutral;  so- 
cializing of  consumption ;  cooperation  of  con- 
sumers to  secure  greater  pleasure ;  the  formation 
of  harmonious  complements ;  and  such  modifica- 
tions of  consumption  as  shall  permit  the  utiliza- 
tion of  new  resources.  The  following  examples 
will  be  noticed  of  the  means  by  which  social 
surplus  may  be  increased  so  far  as  this  can  be 
done  by  a  diminution  of  costs :  division  of  labor ; 
territorial  division  of  labor;  organization  of  in- 
dustry ;  improvements  in  transportation ;  in- 
crease of  capital ;  increase  in  the  productivity 
of  land  ;  changes  in  the  distribution  of  popu- 
lation ;  invention ;  hereditary  transmission  of 
industrial  qualities ;  education  and  industrial 
training  ;  growth  of  moral  qualities. 

First   among   the   means   of    increasing   the 
utilities  which  society  may  obtain  from  the  envi- 


122  ECONOMICS 

ronment  with  a  given  expenditure  of  effort  is 
the  increase  in  variety  of  consumption  which 
naturally  follows  the  reduction  of  the  appetite 
for  particular  commodities.  This  tendency  has 
already  received  attention  in  connection  with 
individual  consumption.  But  there  is  a  social 
gain  which  is  greater  than  the  gains  to  individ- 
ual consumers.  When  there  is  no  diversity  of 
consumption,  and  but  few  commodities  are  de- 
sired, all  consumers  necessarily  demand  the 
same  things.  But  when  diversity  begins,  all 
consumers  do  not  modify  their  consumption  in 
exactly  the  same  way.  The  growth  of  new 
wants  prevents  the  utilities  from  diminishing 
with  the  former  rapidity,  and  when  different 
consumers  develop  dissimilar  wants,  a  com- 
modity may  satisfy  a  high  want  for  one  class  of 
consumers,  though  it  is  capable  of  satisfying 
only  a  low  want  for  other  consumers,  or  it  may 
have  for  them  no  utility  whatever.  Commod- 
ities are  brought  above  the  margin  of  consump- 
tion because  new  uses  are  found  for  them,  or 
because  the  wants  which  they  are  calculated  to 
satisfy  increase  in  intensity.  The  surplus  on 
other   commodities   is   increased   by   the    same 


SOCIAL  PROSPERITY  1 23 

process,  and  the  entire  social  surplus  is  thus 
enlarged. 

The  consumption  of  the  individual  is  im- 
proved, as  we  have  seen,  by  the  substitution  of 
commodities  which  confer  positive  pleasure, — 
while  they  at  the  same  time  prevent  suffering 
or  preserve  life,  —  for  those  commodities  which 
could  perform  only  the  latter  function.  This 
substitution  goes  on  in  society  with  great  ra- 
pidity because  of  the  interchange  of  experiences. 
Since  consumers  have  many  qualities  in  com- 
mon, the  union  of  consumers  in  society  gives 
additional  intensity  to  this  force  which  is  oper- 
ating to  increase  surplus  utility.  Practically, 
almost  every  important  discovery  becomes,  soon 
after  it  is  made,  the  common  property  of  all 
civilized  men,  and  the  social  process  of  eliminat- 
ing absolute  but  negative  utilities  becomes  thus 
one  of  the  most  obvious  methods  by  which  the 
social  surplus  is  increased. 

The  socializing  of  consumption  ^  is  a  term  ap- 
plied to  the  process  by  which  those  forms  of 
consumption  are  extended,  which  include  other 

1  An  excellent  expression  suggested  by  Professor  Smart,  in 
Annals  of  American  Academy,  November,  1892,  p.  34. 


124  ECONOMICS 

persons  than  the  original  consumer  in  the  bene- 
fit conferred.  A  Christmas  dinner  is  given,  for 
instance,  to  which  many  guests  are  invited.  It 
must  be  assumed  that  the  host  derives  from  the 
meal  a  pleasure  sufficient  to  compensate  him 
for  all  the  expenses  incurred.  It  is  even  prob- 
able that,  like  other  commodities,  the  dinner  gives 
him  a  surplus  of  utility.  In  estimating  the  gain 
to  society  we  must  take  into  account  not  only 
this  surplus  to  the  host,  but  also  the  utilities 
enjoyed  without  expense  by  the  guests.  The 
Christmas  dinner  is  typical  of  a  large  and  in- 
creasing class  of  pleasures.  A  costly  work  of 
art  may,  if  consumption  be  sufficiently  socialized, 
give  pleasure  to  thousands  beside  the  owner. 
Thoreau  "  owned  "  all  the  desirable  farms  near 
Concord,  because  he  could  not  be  prevented 
from  getting  that  kind  of  enjoyment  from  them 
which  he  most  highly  prized.  Perhaps  the 
widest  scope  for  socialized  consumption  lies  in 
the  enjoyment  of  natural  scenery,  since  it  is 
difficult  for  the  owner,  even  if  he  desires,  to 
exclude  others  entirely  from  the  view  of  a 
mountain,  a  lake,  or  a  wood.  To  a  very  great 
extent,  however,  even  this  has  been  done,  and 


SOCIAL  PROSPERITY  1 25 

there  is  no  loss  to  society  more  indefensible  and 
unjust  than  that  which  comes  from  exclusive 
consumption  of  those  commodities  that  are 
calculated  to  give  pleasure  to  large  numbers  of 
people.  Society  may  directly  increase  its  sur- 
plus, without  increasing  the  quantity  of  material 
commodities,  by  all  those  changes  which  make 
consumption  social  rather  than  exclusive. 

Somewhat  different  from  the  foregoing  is  the 
tendency  of  consumers  to  choose  those  forms  of 
wealth  which  are  possible  only  when  the  social 
instincts  are  sufficiently  developed  to  permit 
the  union  of  many  persons  in  a  common  pleas- 
ure. For  many,  the  family  is  the  only  recog- 
nized social  unit  for  purposes  of  consumption. 
It  is  fully  realized  that  within  the  family  the 
common  enjoyment  increases  rather  than  de- 
creases the  pleasure-giving  power  of  the  com- 
modities. That  which  from  one  standpoint 
might  be  looked  upon  merely  as  a  disagreeable 
necessity,  becomes,  with  the  development  of  the 
love  of  family  and  kindred,  a  source  of  enjoyment. 
Under  the  tribal  system  the  social  unit  for  con- 
sumption is  a  much  larger  one,  and  even  under 
the  guild  system  the  unit  commonly  included, 


126  ECONOMICS 

together  with  the  master's  family,  a  number  of 
journeymen  and  apprentices.  It  is  doubtful 
whether  there  has  not  been  a  social  loss  by  the 
economic  changes  which  have  accompanied  the 
breaking  up  of  these  larger  units  and  the  in- 
troduction of  the  present  system,  in  which  the 
prevailing  unit  is  the  small  family,  and,  if  unmar- 
ried, the  individual  consumer.  But  in  highly 
developed  society  a  new  tendency  is  seen  to  be 
operating  toward  the  forming  of  social  units  for 
the  consumption,  not  so  much  of  the  necessaries, 
as  of  the  comforts  and  luxuries  of  life.  The 
school,  the  university,  the  church,  the  theatre, 
the  railway,  and  the  public  highway  are  regarded, 
by  some  whose  primitive  instincts  are  strong,  as 
an  unavoidable  evil,  only  to  be  submitted  to  as 
substitutes  for  private  drives,  family  tutors, 
privately  engaged  musicians,  etc.,  because  the 
latter  pleasures  are  put  beyond  reach  by  their 
expense.  That  this  is  not  the  universal  view, 
however,  is  apparent  from  the  preference  shown 
for  the  cooperative  forms  of  consumption  by 
many  who  are  above  considerations  of  expense. 
The  boy  who  is  to  be  the  future  German  em- 
peror is  taught,  like  any  German  youth,  in  the 


SOCIAL  PROSPERITY  \2^ 

public  gymnasium  and  in  the  University  of 
Bonn.  The  wealthiest  man  does  not  refuse 
the  public  service  for  the  transportation  of  his 
letters.  He  has  his  box  in  the  public  opera  and 
his  pew  in  the  public  church. 

These  two  tendencies  toward  the  socializing 
of  consumption,  i.e.,  the  increase  of  those  forms 
of  consumption  that  involve  some  benefit  to 
others  than  the  one  who  selects  and  pays  for 
the  commodity;  and  cooperation  in  consump- 
tion, i.e.,  the  increase  of  those  forms  of  consump- 
tion that  rest  upon  the  willingness  of  man  to  co- 
operate with  others  in  a  common  expenditure,  — 
are  tendencies  which  mark  the  more  advanced 
stages  of  social  progress.  It  should  be  pointed 
out  that  but  very  little  consumption  belongs  as 
yet  in  either  of  these  two  classes.  Individual 
instances,  like  those  cited,  are  not  rare,  but  the 
greater  part  of  our  consumption  is  unfortu- 
nately selfish,  exclusive,  and  unsocial.  The  loss 
to  society  from  this  source  is  very  great ;  or,  to 
state  the  same  fact  in  the  more  hopeful  way, 
the  possibilities  of  increasing  the  social  surplus, 
and  hence  the  general  prosperity,  from  this 
source,  are  very  great. 


128  ECONOMICS 

If  it  be  true  that  the  individual  consumer 
may  greatly  increase  the  utility  of  the  com- 
modities which  he  consumes  by  such  combina- 
tions as  produce  harmonious  effects,  there  is 
here  a  further  means  by  which  the  social  sur- 
plus may  be  increased.  The  special  field  cov- 
ered by  the  application  of  this  principle  to 
social  surplus  is  the  large  field  of  socially  con- 
sumed commodities,  —  not  merely  the  streets, 
sidewalks,  street-cars,  railways,  hotels,  theatres, 
etc.,  but  also  such  commodities  as  the  news- 
paper, the  lecture,  and  the  gas  and  water  supply, 
the  common  peculiarity  of  all  being  that  they 
are  desired  by  a  large  number  of  people  at 
about  the  same  time  and  in  about  the  same 
form.  The  formation  of  complements  among 
these  commodities  is  no  less  marked  than  in 
individual  consumption.  To  the  increase  of  the 
social  surplus  in  this  way  must  be  added  the 
increase  of  utility  secured  by  the  individual 
consumer  from  the  complements  which  he 
forms.  The  increase  of  prosperity  from  wiser 
and  more  economical  consumption  has  in  many 
directions  greater  possibilities  than  have  yet 
been  recognized,  and  many  of  these  lie  within 


SOCIAL  PROSPERITY  1 29 

the  scope  of  this  principle :  that  the  utility  of  a 
group  may  be  enhanced  by  such  change  in  its 
composition  as  shall  displace  discord  by  har- 
mony, and  produce  a  more  perfect  synthesis. 

Many  of  the  modifications  of  consumption 
which  are  pronounced  by  the  economist  to  be 
desirable  changes  are  so  because  the  direct 
effect  of  the  changes  upon  the  feelings  is  such 
as  to  produce  greater  sensations  of  pleasure. 
More  intense  wants  are  satisfied  with  a  given 
effort  after  the  change  than  it  was  possible  to 
satisfy  before.  Other  changes  in  consumption 
are  deemed  desirable,  not  because  they  produce 
such  direct  effect,  but  because  of  peculiar  con- 
ditions attached  to  the  productive  resources  or 
agencies.  The  social  surplus  may  be  increased 
by  such  modifications  of  consumption  as  permit 
a  fuller  utilization  of  resources  already  some- 
what drawn  upon,  and  the  utilization  of  new 
resources.  This  principle,  though  not  of  greater 
significance  in  the  long  run  than  the  principles 
already  developed,  is  of  even  greater  immediate 
importance  for  the  American  economist,  since 
there  are  here  enormous  resources  which  remain 
undeveloped,  not   because   there   is   a   lack   of 


130  ECONOMICS 

labor  or  capital  to  develop  them,  but  because 
demand  is  not  of  such  a  character  as  to  warrant 
the  new  product  being  brought  to  the  markets. 
The  woollen  cloth  with  rough  finish  which  re- 
cently became  popular  for  business  and  even 
for  professional  suits,  is  made  from  the  longer 
and  somewhat  coarser  wool  which  can  be  pro- 
duced in  this  country.  It  is  no  less  durable 
and  no  less  attractive,  when  people  have  become 
accustomed  to  its  appearance,  than  the  smoother 
finish  of  the  woollens  which  were  formerly  ex- 
clusively worn.  The  increased  consumption  of 
this  less  expensive  cloth  becomes  therefore  a 
good  example  of  the  creation  of  utilities  by 
simple  changes  in  consumption.  When  those 
changes  are  far-reaching  and  affect  a  whole 
country  they  may  increase  materially  the  social 
surplus.  The  extent  to  which  the  general  well- 
being  may  be  increased  by  economies  of  con- 
sumption is  seldom  realized  more  vividly  than 
by  those  who  observe  closely  the  changes  in 
consumption  in  periods  of  general  depression. 
Changes  in  consumption  become  the  means  of 
preventing  much  positive  hardship.  Commodi- 
ties are  made  to  "  go  farther,"  that   is  to  say, 


SOCIAL  PROSPERITY 


131 


their  utilities  are  increased.  But  if  similar 
economies  were  practised  in  more  prosperous 
times,  the  social  surplus  would  be  permanently- 
increased.  All  changes  which  act  upon  general 
well-being  by  making  commodities  "go  farther" 
than  they  previously  did,  act  upon  the  social 
surplus  by  increasing  the  total  utilities  of  the 
commodities  produced. 
A 


Fig.  IV. 


An  increase  of  the  social  surplus  in  any  of 
the  ways  already  described  is  indicated  by  the 
modifications  of  Figure  III.  shown  in  Figure  IV. 
Starting  with  the  conditions  as  they  exist  at  the 


132  ECONOMICS 

beginning  of  the  working  day,  the  area  ABCD 
may  be  increased  by  anything  which  increases 
the  utiUty  of  the  commodities  consumed.  The 
cost  line  retains  its  position,  but  utihties,  instead 
of  diminishing  rapidly  from  AB  to  DC,  remain 
more  nearly  equal,  the  marginal  commodity  ris- 
ing on  the  first  improvement  in  consumption 
from  DC  to  GC,  and  later  to  HC.  The  surplus 
utility  of  the  last  commodity  increases  from  DE 
to  GE,  and  then  to  HE.  The  effect  of  this  in- 
crease of  the  surplus,  though  the  fact  is  not 
shown  in  Figure  IV.,  would  undoubtedly  be  to 
extend  the  line  BC  That  is,  the  increased  sur- 
plus would  become  an  increased  incentive  to 
production,  and  more  commodities  would  be 
produced.  The  gain,  therefore,  from  improve- 
ments of  the  kind  which  have  been  noted  is  not 
fully  shown  when  only  the  increased  surplus  on 
the  commodities  consumed  is  pointed  out.  The 
relative  surplus  on  the  additional  commodities 
produced  would  not  be  greater,  because  costs 
would  continue  to  increase,  but  the  absolute 
surplus  would  be  thereby  increased. 

But  this  surplus  area  may  be  increased  in  the 
manner  indicated  in  Figure  V.     Total  utilities 


SOCIAL  PROSPERITY 


133 


remain  unchanged,  but  costs  are  reduced. 
Anything  which  checks  the  tendency  toward 
the  increase  of  costs  operates  as  directly  on  the 
increase  of  the  surplus  as  do  the  forces  which 
check  the  tendency  toward  diminishing  the 
utilities.       Beginning    with    conditions    repre- 


FlG.  V. 

sented  by  the  area  FBCE,  identical  with  the 
area  described  by  the  same  letters  in  Figures 
II.,  III.,  and  IV.,  the  cost  line  can  be  forced 
down  by  improvements  in  the  productive  pro- 
cesses to  FT,  and  finally  to  FJ.  By  each  of 
these  changes   the    area   representing   surplus 


134  ECONOMICS 

utilities  is  increased.  The  surplus  on  the  last 
commodity  produced  grows  greater  and  is  rep- 
resented by  the  distances,  DE,  DI,  and  DJ,  at 
the  different  stages.  These  changes  would 
also  have  an  effect  upon  the  number  of  com- 
modities produced.  The  increased  incentives 
introduced  by  the  reduction  of  costs  lead  to 
further  production,  and  the  line  BC  is  ex- 
tended. The  limit  of  extension  for  this  line  is 
the  place  at  which  the  cost  line  and  the  utility 
line  would  intersect.  D  and  E  may  coincide, 
but  the  line  EC  cannot  be  of  greater  length 
than  the  line  DC.  That  is  to  say,  a  commodity 
will  not  be  produced  if  its  utility  is  not  at  least 
equal  to  its  cost. 

It  is  not  necessary  to  discuss  in  detail  all  the 
various  forces  which  operate  to  increase  social 
surplus  by  reducing  costs,  because,  though  they 
logically  demand  attention  at  this  place,  some 
of  them  are  sufficiently  well  known  to  be  re- 
garded as  commonplace.  They  are  nevertheless 
of  sufficient  importance  to  require  brief  mention. 
Most  prominent  among  these  various  phases  of 
industrial  progress  is  the  extension  of  the  prin- 
ciple of  the  division  of  labor.     This  is  preemi- 


SOCIAL   PROSPERITY  1 35 

nently  a  principle  which  springs  from  social 
relations.  The  chief  advantage  of  the  division 
of  labor  is  that  each  producer  may  devote  him- 
self to  the  particular  tasks  for  which  he  is  fitted 
by  nature  and  training.  Since  under  the  divis- 
ion of  labor  one  does  not  consume  the  products 
of  his  own  labor,  but  exchanges  those  products 
for  the  commodities  which  he  desires,  he  may 
disregard  his  consumption  when  deciding  to 
what  occupation  he  shall  devote  himself.  So 
much  would  follow  upon  a  mere  division  of 
trades,  by  which  is  meant  the  separation  of  pro- 
ducers into  those  who  produce  farm  products, 
those  who  produce  shoes,  those  who  produce 
clothing,  etc.,  etc. 

There  is,  however,  a  further  division  of  em- 
ployments within  these  separate  branches  of 
industry.  In  a  large  manufacturing  establish- 
ment the  different  processes  in  the  production  of 
a  commodity  are,  under  a  more  minute  division 
of  labor,  assigned  to  different  classes  of  work- 
men. No  one  produces  an  entire  commodity 
which  he  can  exchange  for  the  commodities 
needed  for  his  own  consumption,  but  each  re- 
ceives certain   raw  materials  or  certain  partly 


136  ECONOMICS 

finished  commodities,  performs  on  them  certain 
operations  for  which  he  is  especially  trained, 
and  passes  them  on  to  another  producer 
who  does  likewise.  In  a  stove  factory,  for  in- 
stance, one  man  must  spend  his  time  in  grinding 
the  "  edges  "  used  in  ornamentation.  The  work 
is  monotonous,  yet,  compared  with  other  occu- 
pations, the  work  of  edge-grinder  demands  con- 
siderable skill  and  offers  considerable  variety  of 
bodily  exercise.  Industrially,  a  division  of  labor 
as  minute  as  the  market  for  the  product  will 
permit  is  a  gain  —  offset  at  times,  however,  by 
physical  injury  to  the  individual  worker.  Greater 
skill,  precision,  and  speed  are  gained  when  the 
number  of  operations  which  the  laborer  is  com- 
pelled to  learn  is  made  as  small  as  possible. 
Work  is  distributed  in  accordance  with  the 
endowments  of  the  laborer,  and  the  acquire- 
ment of  a  high  degree  of  skill  is  made  possible. 
By  the  extension  of  the  division  of  labor  the 
social  cost  of  producing  a  given  quantity  of 
commodities  is  reduced. 

The  territorial  division  of  labor  is  advanta- 
geous, but  it  rests  upon  a  somewhat  different 
basis.     Each  part  of  the  earth  is  better  suited 


SOCIAL  PROSPERITY  1 37 

to  the  production  of  some  commodities  than 
to  the  production  of  others,  and  if  in  each  dis- 
trict attention  is  paid  to  the  peculiar  qualities  of 
that  district,  and  there  is  corresponding  increase 
of  exchange,  the  total  cost  of  producing  the 
commodities  desired  will  be  lower  than  if  it  is 
attempted  to  produce  commodities  where  the 
natural  conditions  are  unfavorable.  Every  judi- 
cious extension  of  the  territorial  division  of  labor, 
whether  between  countries  or  between  different 
sections  of  the  same  country,  tends  to  reduce 
costs. 

By  the  organization  of  industry  is  meant  not 
merely  the  separation  of  producers  into  trades 
and  into  minute  portions  of  trades,  but,  further, 
the  bringing  together  of  the  various  productive 
agencies  in  such  a  way  that  they  become  really 
operative  and  efficient.  It  is  the  name  applied 
to  a  series  of  positive  actions.  A  farmer,  by 
years  of  saving,  succeeds  in  getting  control  of  a 
certain  amount  of  capital,  or  he  borrows  from 
some  one  who  has  saved  it  the  capital  he  needs ; 
selects  a  farm  suitable  to  the  crop  which  he  ex- 
pects to  raise,  and  within  reach  of  his  market ; 
he  employs  the  necessary  laborers,  he  purchases 


138  ECONOMICS 

the  necessary  implements,  he  chooses  the  seed 
that  is  to  be  planted,  he  directs  how  much  labor 
shall  be  put  on  each  field,  how  many  times  the 
corn  shall  be  ploughed,  what  fences  shall  be 
built,  when  the  crop  shall  be  harvested,  where  it 
shall  be  offered  for  sale,  —  in  a  word,  he  organ- 
izes industry.  With  the  extension  of  the  division 
of  employments  the  organization  becomes  more 
complex,  but  the  division  and  the  organization 
are  not  identical.  The  organization  may  be  very 
highly  developed  in  industries  which,  from  their 
nature,  do  not  allow  a  minute  division  of  labor, 
and  the  organization  may  be  very  weak  at  cer- 
tain points,  though  a  thorough  division  of  labor 
has  been  introduced.  Those  improvements  in 
the  organization  of  industry  which  prevent  mis- 
applications of  capital  or  energy  materially 
reduce  the  costs  of  production.  As  the  organiza- 
tion of  industry  becomes  more  intricate  it  be- 
comes at  times  more  sensitive,  and  a  reduction  of 
costs  may  often  be  secured  by  such  changes  in 
the  forms  of  organization  as  shall  secure  more 
perfect  insurance  against  loss. 

Improvements  in  transportation  lower  costs 
by  permitting   an   extension   of   the   territorial 


SOCIAL  PROSPERITY  1 39 

division  of  labor,  by  permitting  laborers  to 
get  easier  access  to  new  productive  resources, 
and  in  other  obvious  ways.  Few  other 
mechanical  discoveries  have  lightened  the 
costs  of  production  to  so  great  a  degree  as 
the  improved  methods  of  transportation  which 
have  come  into  general  use  during  the  pres- 
ent century. 

The  increase  of  capital  at  the  disposal  of 
society  greatly  facilitates  production.  Costs 
are  reduced  when  capital  is  inherited,  the 
quantity  of  capital  b6ing  increased  by  the 
accumulations  of  successive  generations. 
The  growth  of  the  saving  instincts  makes  the 
accumulation  of  capital  continually  easier  in 
a  progressive  society.  Each  generation  adds 
to  the  stock  of  relatively  imperishable  goods, 
and  each  generation  becomes  more  able  to 
retain  the  utilities  of  perishable  goods  by  con- 
tinued reproduction.  The  effect  of  this  growth 
of  utilities  is  particularly  noticeable  in  the 
case  of  land.  Each  generation,  under  good 
methods  of  cultivation,  makes  the  land  more 
productive  than  it  found  it.  Permanent  im- 
provements  are   made,   the   rotation   of    crops 


140  ECONOMICS 

suited  to  particular  lands  is  discovered,  methods 
of  fertilizing  are  improved,  the  growth  of 
population  steadily  enhances  the  utility  of 
particular  tracts.  In  these  ways  the  pro- 
ductivity of  land  is  increased,  that  is,  the 
quantity  of  labor  required  to  produce  a  given 
number  of  commodities  is  reduced.  Both 
the  increase  of  capital  and  the  increase  of  the 
productivity  of  land  are  powerful  agencies  in 
the  reduction  of  social  costs. 

By  changes  in  the  distribution  of  popula- 
tion which  shall  prevent  unnecessary  trans- 
portation and  manufacture;  by  invention  of 
new  processes ;  by  the  hereditary  transmission 
of  industrial  qualities  originally  acquired,  it 
may  be,  at  great  cost;  by  improved  methods 
of  education  and  industrial  training;  and 
finally  by  the  growth  of  such  moral  qualities 
as  love  of  home  and  country,  industriousness, 
and  energy, — by  all  these,  and  other  means 
that  will  occur  to  the  reader,  the  costs  of 
producing  the  commodities  which  are  de- 
manded by  society  are  very  much  reduced. 

These  two  kinds  of  progress,  which  have 
been    distinguished    as    social    and    industrial, 


SOCIAL   PROSPERITY 


141 


are  in  reality  closely  combined,  and  interact 
upon  each  other.  Wise  changes  in  consump- 
tion directly  increase  utilities,  but  they  also 
influence  industrial  progress  favorably.  Figure 
VI.  exhibits  the  modifications  of  the  social 
A 

H 


D 
E 


C 


Fig.  VI. 


surplus  area  necessary  to  indicate  the  union 
of  social  and  industrial  progress.  Both  the 
line  AD  and  the  line  FE  tend  toward  the 
horizontal,  the  one  forced  upward  at  D  by 
social  progress,  the  other  forced  downward  at 
E  by  industrial  progress.  The  area  A  FED  is 
enlarged  at  the  second  stage  of  progress  to 
AFIG,  and  at  the  third  stage  to  AFJH. 
Prosperity   is   increased    by   the    twofold    pro- 


142  ECONOMICS 

cess  of  increasing  utilities  and  decreasing  costs. 
The  line  BC  is  extended  to  BC\  and  then 
to  BC^\  because  under  the  new  incentives 
more  commodities  are  produced.  The  total 
costs,  after  production  is  thus  extended,  are 
greater  than  before,  but  the  relative  costs  are 
much  less  because  of  the  increase  of  utilities, 
and  the  surplus  utility  on  each  commodity  is 
made  greater.  The  inducement  of  society  to 
produce  lies  in  the  amount  of  this  surplus; 
and  in  the  increase  brought  about  by  the 
joint  action  of  the  two  sets  of  tendencies, 
grouped  under  the  very  general  terms  indus- 
trial and  social  progress,  are  to  be  found  the 
springs  of  that  irresistible  impulse  to  intense 
industrial  activity  which  is  so  characteristic 
of  modern  society. 


CHAPTER  VIII 

THE   STANDARD   OF   LIVING 

The  standard  of  living  is  a  collective  term 
for  the  necessaries,  comforts,  and  luxuries  which 
are  within  reach  at  a  given  time,  and  which  are 
so  related  to  each  other  that  none  can  be 
dropped  without  lessening  the  amount  of  pleas- 
ure to  be  obtained  from  the  others  and  so 
checking  general  prosperity.  The  standard  of 
living  directly  determines,  not  only  wages  in 
the  narrower  sense,  but  all  forms  of  personal 
income,  except  those  which,  like  interest  on 
inherited  capital,  are  fixed  almost  solely  by 
causes  external  to  man's  personal  activity. 
The  income  of  an  individual  producer  is  deter- 
mined in  some  instances  by  the  standard  of 
the  class  of  producers  to  which  he  belongs, 
rather  than  by  his  own  personal  standard. 
This  is  particularly  true  in  the  case  of  pro- 
ducers who  have  no  capacity  for  initiating  new 
enterprises  and  for  acting  independently  of 
143 


144  ECONOMICS 

the  cooperation  of  their  fellows.  Without 
entering  further  into  questions  of  distribution, 
it  may  be  admitted  that  other  causes  unite  with 
the  standard  of  living  to  cause  high  or  low 
wages,  though  there  is  no  other  influence  so 
powerful  or  direct  in  determining  whether 
income  shall  be  great  or  small;  and  it  may 
be  admitted  that  the  effects  of  the  standard 
of  living  are  more  immediate  and  obvious  in 
the  case  of  the  more  intelligent  and  energetic 
producers,  though  a  modification  of  the  stand- 
ard is  essential  to  any  permanent  improvement 
in  the  economic  condition  of  even  the  most 
helpless  and  degraded  classes. 

If  to  the  standard  of  living  is  to  be  assigned 
so  important  a  function  as  is  implied  in  class- 
ing it  foremost  among  the  influences  which 
determine  income,  and  thus  determine  what 
degree  of  prosperity  is  to  be  enjoyed,  it  be- 
comes a  clear  duty  to  ascertain  how  the  stand- 
ard itself  is  determined.  The  standard  is  high 
if  it  includes  a  relatively  great  variety  of  com- 
modities ;  if  these  commodities  satisfy  intense 
wants  so  that  their  utility  is  relatively  great; 
if  the  relations  estabUshed  among  the  commod- 


THE   STANDARD   OF   LIVING  1 45 

ities  have  become  so  intricate,  and  the  bonds 
connecting  them  to  each  other  so  numerous, 
that  every  commodity  is  held  in  the  standard 
by  the  greatest  possible  number  of  separate 
associations.  But  what  conditions  are  favor- 
able to  this  greater  variety,  higher  utility,  and 
more  intimate  association?  The  answer  is 
found  in  certain  of  the  primary  laws  of  con- 
sumption already  developed. 

All  those  commodities  will  be  included  in 
the  standard  of  living  which  have  as  great  a 
surplus  of  utility  over  cost  as  the  original  food 
supply  has  at  the  same  time.  If  we  crave  an 
object  as  the  hungry  man  craves  food,  we  are 
equally  sure  to  get  it.  Commodities  are  chosen 
in  the  order  of  their  surplus  utility.  Even  in 
the  earliest  stages  of  social  development  several 
articles  of  food  will  be  chosen  because  they  are 
imperatively  demanded  by  the  system.  The 
beginning  will  be  made  with  those  articles 
which  can  be  produced  at  the  lowest  cost. 
Utility  is  uniform  because  the  tastes  are  not 
sufficiently  developed  to  permit  any  great  pref- 
erence for  one  commodity  over  another,  while 
differences   in    cost    are    so    marked    that   the 


146  ECONOMICS 

relative  amount  of  surplus  utility  is  determined 
almost  solely  by  these  differences.  In  cold 
countries  one  or  two  articles  of  clothing  will 
be  urgently  desired  for  similar  reasons.  The 
standard  includes  simply  the  few  articles  of 
food  and  clothing  that  have  the  highest  surplus 
utility.  The  standard  will  be  low,  i.e.y  but  few 
necessaries,  scarcely  any  comforts,  and  no  lux- 
uries will  be  enjoyed,  because  in  the  economic 
order  of  consumption  there  are  a  few  commodi- 
ties which  have  a  large  surplus,  all  other  com- 
modities having  little  or  no  surplus,  because  of 
their  low  utility,  or  more  frequently  because  of 
their  high  cost.  The  first  imperative  condition, 
therefore,  of  an  improvement  in  the  standard 
of  living  is  a  modification  of  the  economic 
order  of  consumption. 

In  the  propositions  concerning  consumption,^ 
the  different  methods  in  which  the  economic 
order  of  consumption  is  modified  were  indi- 
cated. The  method  which  would  obviously 
come  earliest  into  operation  is  the  one  first 
enumerated,  a  change  in  the  relative  cost  of 
producing  different  commodities.     Any  change 

1  Chapter  VI. 


THE  STANDARD   OF  LIVING  1 47 

which  would  bring  a  commodity  of  equal  utility 
nearer  to  the  cost  level  of  the  articles  already 
in  the  standard  would  be  a  favorable  condi- 
tion to  an  increase  in  variety.  A  change  in 
appetite  affords  a  condition  quite  as  favora- 
ble, if  it  reduces  the  undue  surplus  on  articles 
already  consumed  by  a  decrease  of  appetite, 
or  if  it  increases  the  number  of  commodi- 
ties available  by  the  opposite  process  of  bring- 
ing the  utility  on  a  new  commodity  far  above 
its  cost.  After  the  change  in  appetite  it  is 
found  that  some  new  article  of  food  satisfies 
so  keen  a  taste  that  its  high  cost  is  no  longer 
an  obstacle  to  its  entering  the  standard. 
More  common  than  either  of  these  simplest 
processes  is  the  more  complex  process  of  the 
formation  of  new  complements  by  the  sub- 
stitution of  positive  for  negative  or  neutral 
utilities,  the  elimination  of  discordant  ele- 
ments, changes  in  the  imputation  of  utility. 
The  standard  is  improved  when  that  which 
gives  pleasure  is  substituted  for  that  which 
had  been  used  from  necessity,  having  cost  as 
much,  but  having  been  incapable  of  afford- 
ing any  positive  degree  of   enjoyment.      Each 


148  ECONOMICS 

hour's  labor  devoted  to  the  production  of 
the  new  commodity  yields  a  greater  return 
than  before.  There  is  now  additional  motive 
for  undertaking  the  labor.  The  standard  is 
higher,  and  income  is  correspondingly  in- 
creased. 

Every  stage  of  social  progress  is  marked 
by  the  transformation  of  luxuries  into  neces- 
saries. In  a  progressive  society  luxuries  are 
those  commodities  which  stand  in  the  outer 
court  about  to  enter  the  standard  of  life.^ 

Mention  has  already  been  made  of  the 
natural  tendency  to  attribute  most  of  the 
pleasure  derived  from  a  group  of  commodi- 
ties to  those  elements  last  added  to  the  con- 
sumption. These  are  the  elements  that  are 
vaguely  termed  luxuries.  Unpleasant  asso- 
ciations cluster  around  the  more  primitive 
pleasures.  The  consumer  is  strongly  inclined 
to  satisfy  his  needs  without  resorting  to  the 
commodities  which  he  once  enjoyed,  but  now 

1  Luxuries  are  defined  by  Professor  Patten  as  articles  that 
the  civilized  man  must  have  to  keep  disagreeable  associations 
from  destroying  the  utility  of  necessaries  ;  Dynamic  Econo7n- 
ics,  p.  131. 


THE   STANDARD   OF   LIVING  1 49 

detests  because  of  the  changes  in  himself. 
This  desire  to  avoid  disagreeable  associations 
leads  to  a  keener  appreciation  of  the  pleasure 
to  be  derived  from  a  complement  from  which 
they  are  entirely  absent.  The  new  commodi- 
ties are  made  to  enter  the  standard  with  a 
high  degree  of  utility  imputed  to  them,  be- 
cause they  enable  the  consumer  to  receive 
the  full  effect  of  pleasant  impressions  and  to 
avoid  the  disagreeable  associations  if  they 
exist.  The  new  standard  may  have  greater 
or  less  expense  than  the  old.  If  it  has  less, 
there  will  be  a  direct  motive  to  improve  it 
still  further.  If  the  expense  of  the  new 
standard  be  greater  than  that  of  the  old,  the 
consumer  will  not  throw  out  the  new  articles, 
but  will  strive  to  increase  his  productive  power ; 
or,  failing  that,  will,  either,  by  limiting  the  size 
of  his  family  or  in  some  other  way,  set  causes 
at  work  which  will  ultimately  cause  a  complete 
readjustment  of  society  to  the  new  standard. 

To  recapitulate :  If  the  economic  order  of 
consumption  is  such  that  a  few  articles -are  used 
practically  to  the  exclusion  of  all  others  because 
of  their  low  comparative  cost,  then  a  change  in 


1 50  ECONOMICS 

the  economic  order  of  consumption  is  an  imper- 
ative condition  of  any  improvement.  Until 
other  things  are  as  cheap  as  rice  in  India,  as 
the  potato  in  Ireland,  as  Indian-corn  bread  and 
bacon  in  some  sections  of  our  Southwestern 
States,  the  standard  of  diet  in  those  places  will 
be  low.  Let  a  number  of  articles  have  nearly 
the  same  degree  of  surplus  over  cost,  and  the 
first  favorable  condition  is  secured.  If  social 
changes  then  effect  a  decrease  of  the  intenser 
appetites,  the  increase  of  variety  is  assured. 
The  articles  before  consumed  can  no  longer  be 
taken  in  large  quantities,  and  when  productive 
power  is  increased  or  new  economies  introduced, 
the  tendency  will  be  to  choose  the  new  com- 
modities which,  by  the  modification  of  the  eco- 
nomic order  of  consumption,  are  brought  within 
reach  of  the  consumer.  The  standard  of  life 
includes  those  articles  only  which  are  brought 
above  the  margin  of  consumption  by  such 
changes  as  give  them  a  surplus  equal  to  the  sur- 
plus on  those  articles  of  food,  shelter,  and  cloth- 
ing which  are  ranked  among  the  necessaries  of 
life. 

To  the  student  who  is  unaccustomed  to  the 


THE  STANDARD   OF  LIVING  151 

technical  terms  of  economic  discussions,  but  is 
interested  in  the  practical  problems  of  consump- 
tion and  production,  even  such  elementary  ex- 
planations as  are  contained  in  the  foregoing 
paragraphs  may  seem  to  be  too  formal  and 
theoretical  for  application  to  actual  conditions. 
The  doctrines  that  income  is  fixed  by  the  stand- 
ard of  living,  that  increase  in  the  variety  of 
consumption  is  conditioned  on  a  decrease  of  the 
intenser  appetites,  that  the  utility  of  a  group  is 
greater  than  the  sum  of  the  utilities  of  its  mem- 
bers, that  progress  is  secured  by  the  gradual 
substitution  of  new  complements,  for  the  older 
and  less  harmonious  complements,  —  doctrines 
which  are  deduced  from  the  fundamental  and 
sufficiently  well-established  facts  revealed  by  in- 
ductive study  of  human  society,  —  are  yet  too 
unfamiliar  for  them  to  seem  concrete  and  real. 
They  are,  however,  in  close  harmony,  so  far  as 
their  practical  application  is  concerned,  with 
those  teachings  which  are  instinctively  recog- 
nized as  sound  even  when  unfortified  by  eco- 
nomic or  philosophical  reasoning. 

A  decrease   in   the   cost   of   commodities,    a 
discovery  of   some  new  mechanical  process,  a 


152  ECONOMICS 

change  in  the  habits  of  consumers,  make  pos- 
sible a  higher  level  of  living  for  all  who  have 
an  assured  income  of  stipulated  amount.  Will 
the  income  now  be  reduced  to  correspond  with 
the  cheaper  cost  of  living,  or,  will  the  advan- 
tage of  the  change  be  retained  by  the  general 
body  of  consumers  ?  For  nine-tenths  of  the 
world  this  is  a  momentous  question.  The  ad- 
vantage will  be  retained  if  the  standard  of 
living  is  modified,  not  otherwise.  Unless  the 
pleasures  which  are  now  brought  within  reach 
are  bound  to  each  other  by  a  multitude  of  new 
associations,  and  the  whole  consumption  ad- 
justed to  the  new  conditions,  its  advantages  will 
slip  away  into  the  hands  of  shrewd  monopolists 
and  unscrupulous  dealers.  Better  choice  of 
food,  abstinence  from  stimulants,  a  heavier 
demand  for  suitable  clothing,  an  insistence  on 
ample  housing  facilities,  are  essential  elements 
in  the  improvement  of  the  standard.  Not  less 
important  than  these  is  such  education  and 
training  as  shall  enable  the  consumer  to  judge 
more  accurately  of  the  value  of  the  simpler 
works  of  literature,  music,  and  art.  "  It  is  not 
a  question  simply  of  choosing  the  good  instead 


THE  STANDARD   OF  LIVING  1 53 

of  the  bad,  but  of  choosing  the  best  instead  of 
the  good." 

The  person  who  is  without  any  canons  by 
which  to  judge  of  a  picture,  or  a  musical  per- 
formance, is  deprived  of  a  large  part  of  the 
benefit  which  he  might  get  from  even  a  small 
income,  and  is  deprived  of  that  barrier  which 
might  have  prevented  a  reduction  of  his  income 
to  the  level  of  actual  necessaries.  The  con- 
sumer who  sees  no  difference  between  trivial 
doggerel  and  the  literary  masterpiece  is  at  a 
distinct  disadvantage  of  the .  same  kind  as  that 
under  which  the  laborer  is  placed  who  uses  but 
a  single  article  of  diet  and  has  in  his  wardrobe 
but  a  single  dilapidated  suit.  Those  consumers 
whose  ideals  are  high,  whose  tastes  are  devel- 
oped harmoniously,  and  whose  demands  call 
for  a  wide  variety  of  physical,  mental,  and  social 
resources,  will  win  a  commanding  place  in  the 
unconscious  economic  struggle  which  continu- 
ally goes  on.  Their  income  will  be  larger, 
their  distribution  fairer,  their  productive  power 
greater.  The  considerations  that  have  been 
presented  have  an  interest  not  academic  merely, 
but  intensely  practical  and  human. 


CHAPTER   IX 

VALUE 

There  are  three  distinct  attributes  of  goods 
which  are  of  fundamental  economic  importance : 
their  utility,  their  value,  and  their  cost.  Refer- 
ence has  already  been  made  to  the  first  and 
third  of  these  attributes.  We  are  now  in  posi- 
tion to  consider  the  character  of  value,  and  the 
laws  which  determine  its  variation. 

By  the  value  of  a  commodity  we  mean  its  cost 
to  the  consumer,  its  power  in  exchange,  the 
measure  of  its  effective  utility,  its  full  impor- 
tance to  the  society  of  which  the  individual 
owner,  or  would-be  purchaser,  is  an  integral 
part.  These  several  phrases,  each  of  which 
may  be  regarded  as  an  equivalent  for  the  term 
"value,"  themselves  demand  explanation.  Such 
explanations  will  throw  light  upon  the  real 
nature  of  value,  and  will  enable  us  subsequently 
to  formulate  a  satisfactory  definition. 
154 


VALUE  155 

The  cost  of  a  commodity  to  the  consumer 
differs  from  its  real  or  producer's  cost,  and  gen- 
erally exceeds  it.  The  real  cost  to  society  is 
the  amount  of  physical  or  mental  exertion,  the 
loss  of  vitality,  involved  in  its  production.  In 
describing  the  making  of  goods  it  was  necessary 
to  dwell  upon  some  of  the  physical  conditions 
of  which  man's  economic  activities  must  take 
account.  Changes  in  those  conditions  are  conr 
tinually  modifying  the  relative  costs  of  different 
commodities,  making  it  harder  to  produce  some, 
and  easier  to  produce  others.  When  the  en- 
vironment as  a  whole  becomes  more  favorable, 
the  total  cost  to  society  may  be  reduced  for  all 
classes  of  goods,  but  not  usually  for  all  classes 
in  equal  degrees.  It  is  conceivable  that  a  wide- 
spread physical  malady  might  so  far  reduce  the 
vitality  of  all  producers  as  to  make  the  costs  of 
production  universally  greater.  When  cost,  in 
economics,  is  contrasted  with  utility,  or  with 
value,  it  is  cost  in  this  sense  of  producer's  ex- 
penditure of  energy  that  is  meant.  Cost  in  this 
sense  is  not  the  equivalent  of  value,  and  does 
not  stand  in  any  constant  relation  to  it. 
•    Early   economic  theories  attempted  to  base 


156  ECONOMICS 

value  upon  cost  of  production,  but  so  many  ex- 
ceptions have  been  found  to  every  law  which 
has  been  formulated  in  accordance  with  such 
theories,  that  the  attempt  has  been  all  but 
abandoned.  But  consumer's  cost  is  a  different 
thing,  and  is,  indeed,  only  another  name  for  value. 
It  denotes,  not  the  actual  cost  of  production,  but 
rather  the  precise  amount  of  some  other  com- 
modity that  must  be  given  up  at  any  given  time 
to  secure  or  retain  possession  of  the  commodity 
in  question.  We  may  contrast  consumer's  cost 
with  the  real  cost  of  production,  just  as  we  con- 
trast the  latter  with  value.  If  the  producer  of 
any  commodity,  dealing  directly  with  the  con- 
sumer, finds  himself,  after  selling  the  commod- 
ity, in  precisely  the  same  position  as  when  he 
began  the  act  of  production,  with  only  a  suffi- 
cient remuneration  to  make  good  his  actual  loss 
of  energy,  then  in  that  special  instance  cost  and 
value,  or,  in  other  words,  consumer's  cost  and 
real  cost,  are  equal.  But  this  is  not  the  normal 
result  of  production  and  exchange. 

Value  may  properly  be  called  power  in  ex- 
change, if  it  is  understood  that  the  expression 
does  not  imply  any  inherent  power  in  the  good 


VALUE  157 

which  is  valued.  The  reason  why  value  came 
to  be  looked  upon  as  power  in  exchange,  is 
that,  in  the  distribution  of  products,  men  are 
willing  to  interchange  only  goods  of  equal  value. 
The  value  does  not  depend  upon  this  fact. 
Value  would  exist  even  if  there  were  no  ex- 
change. It  is  even  possible  to  find  other  exter- 
nal tests  of  value  than  this.  The  amount  of 
value  does  not  come  from  the  ability  of  the  pos- 
sessor to  obtain  in  exchange  such  and  such 
goods.  This  ability,  on  the  contrary,  is  the 
effect  of  the  value  already  existing  in  the  good. 
The  interchange  of  products  is  of  enormous 
advantage  to  society,  and  the  regulator  of  that 
process  is  the  value  of  the  products  to  be  ex- 
changed; but  the  significance  of  value  is  even 
more  far-reaching,  and  its  origin  lies  elsewhere 
than  in  the  market.  Power  in  exchange  is  an 
equivalent  for  value  only  when  value  is  being 
used  to  determine  the  relative  quantities  which 
either  party  to  the  exchange  can  afford  to  give 
up  to  the  other.  It  does  not  exhaust  the  mean- 
ing of  the  word  ''value"  and  is  therefore  not  a 
complete  equivalent. 

When  we  desQnbe  value  as  the  measure  of 


158  ECONOMICS 

effective  utility,^  we  reach  a  far  more  significant 
explanation  of  its  real  character.  The  utility  of 
any  commodity  is  its  power  to  satisfy  desire. 
Its  effective  utility  is  the  extent  to  which  the 
satisfaction  of  the  desire  is  dependent  upon  the 
particular  commodity.  A  glass  of  water  has 
great  utility  if  it  quenches  intense  thirst ;  but 
if,  on  the  loss  of  a  glass  of  water,  another  could 
be  substituted  without  the  slightest  labor  or  in- 
convenience, its  effective  utility  is  zero,  because 
the  satisfaction  of  the  want  is  not  in  the  least 
dependent  upon  the  possession  of  the  particular 
glass  of  water  which  is  actually  used.  If  a 
favorite  volume  of  poems  yields  to  the  reader  a 
delight  which  he  ranks  high  above  ordinary 
pleasures,  its  utility  is  correspondingly  great; 
but  its  effective  utility  is  measured  by  the  im- 
portance which  he  attaches  to  the  volume  in 
view  of  all  the  circumstances  which  have  a  bear- 
ing upon  it,  —  the  possibility  of  securing  another 
copy,  the  possibility  of  substituting  other  poetry, 
or  the  possibility  of  turning  his  attention  to 
other  enjoyments  of  equal  or  nearly  equal  inten- 
sity.    Effective  utility   is  the  term  which   de- 

1  Clark,  Philosophy  of  Wealth,  Chapter  V. 


VALUE  1 59 

scribes  the  entire  effect  of  any  good  upon  the 
consumer's  welfare.  It  includes  its  positive 
utility,  with  any  necessary  deduction  for  second- 
ary negative  utility.^  Value  is  the  measure  of 
this  effective  utility.  It  is  well  to  fix  clearly  in 
mind  this  conception  of  value,  in  order  that  its 
essential  relation  to  utility  may  not  be  lost  sight 
of  in  future  discussions  of  the  laws  by  which 
value  is  determined  and  distributed. 

The  final  phrase  suggested  at  the  outset 
as  an»  equivalent  for  the  value  of  a  com- 
modity is  its  full  importance  to  society.  The 
standpoint  is  here  changed  from  that  of  the 
individual  to  that  of  the  total  body  of  per- 
sons who  might  conceivably  attach  any  im- 
portance to  the  commodity.  It  is  yet  too' 
early  to  inquire  by  what  method  the  estimate 
of  society  is  ascertained ;  but  to  guard  against 
misapprehension  we  may  say  that  the  method 
is  precise  and  invariable,  and  that  it  is  not 
by  taking  an  average  of  the  various  individual 
estimates,  that  the  importance  to  society  is 
determined.  This  shifting  from  the  individual 
to    the    social    standpoint    is    necessary    thus 

1  See  Chapter  V. 


l60  ECONOMICS 

early  in  the  explanation  of  value.  All  the 
various  substitutes  for  the  term  "value"  must 
frequently  be  understood  in  the  social  sense. 
Consumer's  cost  means  the  general  cost  to 
consumers,  not  that  which  an  individual  con- 
sumer may  happen  to  incur ;  power  in  ex- 
change throughout  an  entire  market,  not  in 
an  exceptional  bargain  which  may  fall  to  an 
individual  producer ;  measure  of  effective 
utility,  not  to  an  individual,  but  to  society. 
Value  would  remain  even  if  the  possessor  of 
goods  were  in  complete  isolation,  and  its 
laws  would  correspond  to  those  which  pre- 
vail in  society.  But  unless  by  some  quali- 
fying expression  the  sense  is  limited  to  an 
isolated  individual,  it  is  the  value  to  society 
that  is  the  object  of  investigation. 

Value  can  best  be  explained  by  reference 
to  the  law  of  diminishing  utilities.  It  will 
be  simpler  to  consider  first  the  case  of  an 
isolated  consumer  in  possession  of  a  stock  of 
commodities  which  for  a  definite  period  can- 
not be  increased.  To  adopt  an  illustration 
already  familiar  in  the  discussions  of  value, 
suppose  an  isolated  settler  on  a  Western  prairie 


VALUE  l6l 

to  be  in  possession  of  three  cribs  of  corn, 
one  to  furnish  food  for  his  family  until  the 
next  crop  is  gathered,  a  second  to  feed  his 
team  of  horses,  and  a  third  for  chickens  and 
pigs,  that  he  may  have  meat  for  the  winter. 
The  corn  is  of  uniform  quality.  He  has  no 
other  kinds  of  grain  or  other  substitute  for 
the  corn.  The  three  wants  that  are  to  be 
supplied  by  the  corn  are  of  very  different  de- 
grees of  importance,  but  each  is  satisfied  by 
one-third  of  the  total  supply.  Since  the 
utility  of  a  good  corresponds  to  the  want 
which  it  satisfies,  the  utility  of  the  first  crib 
is  almost  beyond  measure.  The  deprivation 
that  would  be  experienced  by  an  entire  lack 
of  grain  for  his  own  table  would  be  intolera- 
ble. The  utility  of  the  second  crib  is  some- 
what less  immediate,  but  is  still  very  great, 
since  the  team  is  indispensable  in  cultivating 
the  crop  of  the  following  season.  That  of 
the  third  crib  is  much  less,  but  considerably 
above  zero.  Regarding  the  crib  as  the  unit, 
for  convenience,  we  may  represent  the  utility 
of  the  three  cribs  by  the  numbers  lo,  5,  and  3, 
respectively.     The  initial  utility  of  corn  to  the 


1 62  ECONOMICS 

isolated  settler  under  the  circumstances  de- 
scribed is  lo.  The  final  or  marginal  utility 
is  3.  The  total  utility  is  10  plus  5  plus  3, 
or  18.  What  now  is  the  value  or  the  effec- 
tive utility  of  any  one  crib  ?  and  what  is 
the  effective  utility  or  the  value  of  the  entire 
supply  ? 

It  is  obvious  that  the  effective  utility  or 
value  of  each  crib  is  3.  No  crib  can  be 
valued  at  more  than  3  so  long  as  there  is  a 
supply  of  three  cribs.  If  the  crib  which  has 
a  utility  of  10  is  destroyed  or  sold,  it  is  re- 
placed by  one  of  the  others,  and  the  initial 
utility  is  not  sacrificed.  Notwithstanding  the 
differences  in  the  wants  which  they  satisfy, 
the  value  of  each  is  the  same  as  that  of  the 
others  so  long  as  all  are  present,  and  the 
value  of  each  is  equal  to  the  utility  of  the  final 
unit.  The  value  of  the  entire  stock  is  easily 
ascertained  by  multiplying  the  value  of  each 
unit  by  the  number  of  units.  In  the  case 
under  consideration  the  value  of  the  stock 
is  3  X  3,  or  9. 

It  will  be  interesting  to  notice  what  happens 
if   the   settler   by  some   accident   loses  one  of 


VALUE  163 

his  three  cribs.  He  is  no  longer  in  position 
to  supply  all  of  the  wants  for  which  the  three 
cribs  would  have  provided,  and  he  will  natu- 
rally decide  to  do  without  the  chickens  and 
pigs,  utilizing  the  two  cribs  for  family  use 
and  as  feed  for  his  team.  The  initial  utility 
is  10  as  before ;  the  final  utility  is  now  5. 
The  total  utility  is  15.  Since  neither  of  the 
two  cribs  will  be  used  to  satisfy  a  less  want 
than  5,  and  since  neither  of  the  two  can  be 
valued  at  more  than  5  so  long  as  they  are 
interchangeable,  the  value  or  effective  utility 
of  each  crib  is  5,  and  the  value  of  both  is 
2  X  5,  or  10.  In  this  case  a  d^iminution  of  the 
supply  has  actually  increased  its  value,  though 
it  has  diminished  the  utility  by  3.  Value  is 
derived  from  utility,  but  it  does  not  equal  it 
save  in  the  exceptional  case  where  initial  and 
final  utility  are  identical.  If  the  settler  had 
but  one  crib,  or  if  the  two  wants  satisfied  by 
the  two  cribs  were  of  equal  intensity,  the 
final  utility  would  be  equal  to  the  initial 
utility,  and  the  sum  of  utilities  would  be  the 
value  of  the  stock.  Wherever  utilities  follow 
the  ordinary  law  of   a  diminishing    scale,  it  is 


1 64  ECONOMICS 

final  utility,  or  the  utility  of  the  last  incre- 
ment which  the  consumer  is  in  position  to 
enjoy,  that  is  significant  in  determining  value. 
In  the  illustration  we  have  thought  of  a  single 
consumer  and  of  a  single  commodity.  We  may 
transfer  this  conception  of  final  utility  to  the 
entire  consumption  of  a  typical  consumer. 
There  are  many  goods  which  he  is  in  position 
to  enjoy,  and  he  will  consume  them  in  very  di- 
verse quantities.  Each  good  will  begin  with  an 
initial  utility  somewhat  higher  than  the  margin 
of  consumption,^  and  will  fall  as  its  supply  is 
increased  until  its  final  utility  is  similar  to  that 
of  other  commodities  consumed.  The  last  incre- 
ment of  any  article  which  the  consumer  thinks 
it  worth  while  to  possess  has  a  utility  lower  than 
that  of  any  previous  increment,  and  this  is  known 
as  the  final  utility  of  that  particular  commodity. 
At  this  point  utility  and  value  are  equal.  The 
utility  of  this  particular  increment  determines 
the  value  of  the  entire  supply  of  that  commodity. 
Each  of  the  earlier  increments  has  a  value  equal 
to  the  final  utility,  and  the  value  of  the  entire 
stock  is  found  as  before  by  multiplying  the  final 

1  See  Chapter  V. 


VALUE  165 

utility  by  the  number  of  units  in  the  supply  of 
the  consumer. 

If  in  this  way  the  value  of  all  the  commodities 
which  fall  within  the  margin  of  consumption  is 
ascertained,  their  sum  will  express  the  aggregate 
effective  utility  of  all  the  goods  which  at  the  given 
time  the  consumer  has  at  his  disposal.  This 
would  fall  far  short  of  the  total  pleasure  or  bene- 
fit which  he  will  derive  from  their  consumption. 
It  will  express  only  the  extent  to  which  his  wel- 
fare is  affected  by  the  possession  of  these  par- 
ticular goods  —  their  cost  to  him  as  a  consumer, 
their  final  utility,  or  their  value. 

There  is  no  reason  why  this  summation  could 
not  be  extended  to  cover  the  aggregate  con- 
sumption of  the  entire  community.  Value  is 
not  merely  a  ratio,  as  has  sometimes  been  said  ; 
it  is  a  sum  of  final  utilities.  The  fact  that  final 
utilities  are  often  compared  for  purposes  of  ex- 
change, and  their  relation  expressed  in  price, 
which  is  a  ratio,  should  not  blind  us  to  the  fact 
that  value  is  primarily  a  mental  estimate  of  the 
importance  of  goods  to  human  welfare  ;  and  that 
we  may  think  of,  if  not  accurately  calculate,  the 
total  importance  of  all  the  goods  at  the  disposal 


1 66  ECONOMICS 

of  society.  Values,  like  utilities  or  costs,  may 
rise  and  fall.  Whether  they  will  do  either  is 
determined  by  all  the  varying  influences  which 
affect  either  the  wants  of  man,  or  the  extent  to 
which  at  any  given  time  those  wants  are  sup- 
plied. 

If  consumers  have  but  few  wants,  and  those 
are  satisfied  almost  to  satiety,  the  goods  which 
they  consume  will  have  little  value  as  a  whole, 
notwithstanding  their  abundance.  The  final 
utility,  which  is  the  multiplicand  in  determining 
the  value  of  the  supply  of  each  article,  is  small, 
and  the  number  of  articles  whose  joint  value  is 
in  question  is  also  small.  If  a  community  has  a 
great  diversity  of  wants  and  is  in  position  to 
satisfy  each,  even  to  a  very  limited  extent,  it 
will  be  in  a  more  favorable  position.  The  final 
utility  of  each  article  will  be  nearly  as  great  as 
its  initial  utility,  and  the  number  of  articles  will 
be  large.  It  is  probable  that  the  absolute 
amount  of  several  of  the  articles  which  entered 
earliest  into  the  consumption  would  also  be 
great,  as  there  is  always  considerable  difference 
in  the  initial  utility  of  different  elements  of  the 
consumption,  and  large  quantities  of  some  of 


VALUE  167 

the  more  generally  coveted  commodities  will 
be  desired  before  any  beginning  is  made  on 
others. 

Industrial  progress  extends  the  productive 
power  of  society,  enabling  it  to  satisfy  existing 
wants  more  fully.  This  process  constantly 
lowers  the  final  utility  of  the  articles  demanded, 
and  the  decrease  in  cost  is  roughly  followed  by 
a  decrease  in  value.  Social  progress  of  the  kind 
that  elevates  and  diversifies  human  desires  affects 
final  utility  in  an  opposite  direction.  It  diverts 
the  productive  energies  into  new  directions. 
The  multitude  of  new  desires  crowd  upon  the 
older  wants  which  were  so  fully  satisfied,  and  will 
often  prove  to  be  of  so  great  intensity  that  the 
consumer  will  sacrifice  a  portion  of  the  older 
enjoyments  to  obtain  the  new  satisfactions. 
Thus  the  scholar  will  go  hungry  or  naked  to 
secure  a  precious  book  or  manuscript.  This 
brings  about  a  readjustment  of  the  margin  of 
consumption  at  a  point  which  gives  higher  final 
utility  to  all  commodities,  and  adds  to  the  num- 
ber of  commodities  included.  The  value  of 
each  may  be  increased  by  the  rise  in  its  final 
utility,  and  their  individual  value  is  no  greater 


1 68  ECONOMICS 

than  before  the  total  values  are  increased  by  the 
addition  of  new  commodities. 

It  has  already  become  clear  that  an  increase 
of  values  is  not  always  an  indication  of  increased 
welfare.  The  Western  settler  is  not  better  off 
with  two  cribs  of  corn  than  with  three,  although 
he  places  nearly  twice  as  high  a  value  upon  the 
two  after  one  is  destroyed,  as  he  did  upon  any  two 
of  the  three  so  long  as  he  had  them  all.  It  is 
total  utilities  that  limit  welfare,  not  total  values. 
But  in  determining  the  relative  welfare  of  indi- 
viduals in  economic  society,  value  plays  an  im- 
portant part.  The  producer  of  wealth  is  chiefly 
interested  in  the  value  rather  than  in  the  utility 
of  his  product.  A  prominent  inventor  is  said 
to  have  derived  very  little  personal  advan- 
tage from  those  inventions  which  have  most 
contributed  to  human  happiness,  except  that 
they  have  brought  him  personal  satisfaction 
and  renown.  Minor  inventions,  of  which  the 
public  has  known  comparatively  little,  have 
proved  more  profitable  to  him.  Utility  and 
value  may,  as  in  this  instance,  drift  widely  apart, 
and  both  may  be  far  in  excess  of  cost.  Con- 
sumers as  a  class  are  concerned  that  there  shall 


VALUE  169 

be  great  utility  and  little  value  ;  producers,  that 
there  shall  be  great  value  and  little  cost  ;  society 
as  a  whole,  that  there  shall  be  great  utility  and 
little  cost. 

We  must  now  redeem  the  promise  of  an 
earlier  paragraph  to  explain  the  method  by 
which  the  social  value,  or,  to  adopt  a  more 
familiar  expression,  the  market  value,  of  a 
commodity  is  determined.  The  decisive  factors 
are  the  supply  of  the  commodity  and  its  final 
utility  to  the  last,  i.e.,  the  least  eager,  consumer 
who  is  in  position  to  take  any  portion  of  it. 

Let  us  suppose  that  there  are  on  sale  in  a 
given  market  twelve  pairs  of  shoes,  and  that 
there  are  an  indefinite  number  of  persons  who 
desire  shoes,  provided  their  value  is  not  higher 
than  the  final  utility  of  shoes  to  themselves. 
For  the  sake  of  simplicity  it  is  assumed  that 
all  the  shoes  are  to  be  sold,  whatever  they  will 
bring ;  in  other  words,  that  the  present  owners 
do  not  enter  the  lists  in  competition  with 
buyers,  but  freely  place  all  twelve  pairs  in  the 
hands  of  a  dealer  with  instructions  to  sell  them 
all  at  the  best  rate  which  he  can  get.  It  will 
also   be  assumed   that    each  purchaser  desires 


I/O  ECONOMICS 

but  one  pair,  and  that  the  condition  of  con- 
sumers varies  so  widely  that  no  two  will  find 
the  same  final  utility  in  a  pair  of  shoes.  The 
first  finds  himself  in  urgent  need  of  shoes, 
and  their  final  utility  to  him  is  almost  as 
great  as  their  initial  utility.  If  he  could  not 
otherwise  find  suitable  covering  for  his  feet,  he 
would  willingly  go  without  a  suit  of  clothes,  or 
live  in  a  cheaper  house,  to  provide  himself  with 
shoes.  The  final  utility  of  shoes  to  him  we 
may  represent  by  the  number  24.  Others 
among  the  possible  purchasers  attach  less  im- 
portance to  them  by  differences  which  permit 
us  to  range  their  estimates  consecutively  from 
24  to  I,  there  being  a  consumer  for  each  inter- 
vening number.  If  there  were  but  a  single  pair 
of  shoes  to  be  sold,  it  would  bring  24.  The 
duty  of  the  dealer  would  be  to  find  the  pur- 
chaser for  whom  shoes  have  the  highest  utility, 
and  to  insist  upon  securing  all  that  he  is  willing 
to  give.  In  the  case  supposed,  there  are  twelve 
pairs,  and  all  are  to  be  sold.  It  is  therefore 
necessary  that  as  many  as  twelve  customers  be 
supplied,  since  no  one  desires  more  than  one 
pair.     It  is  now  the  duty  of  the  dealer  to  find 


VALUE  171 

the  twelve  customers  for  whom  shoes  have 
higher  final  utility  than  for  any  others,  and  the 
twelfth  or  last  one  to  be  brought  into  the  bar- 
gain will  be,  according  to  the  conditions  as- 
sumed, a  consumer  for  whom  shoes  have  a 
final  utility  of  13.  The  aggregate  of  the  final 
utilities  enjoyed  by  the  twelve  consumers  will 
be  222,^  but  their  market  value  will  be  deter- 
mined by  the  final  utility  of  shoes  to  the  twelfth 
purchaser.  Since  this  is  13,  the  market  value 
of  shoes  on  the  day  of  the  sale  will  be  13,  and 
the  twelve  pairs  will  bring  12  x  13,  or  156- 
Tiiere  is  no  method  by  which  the  dealer  can 
make  any  purchaser,  however  urgent  his  need, 
pay  more  in  the  open  market  than  the  value  of 
the  last  pair  to  be  sold. 

If  he  does  not  care  to  dispose  of  the  whole 
stock,  but  would  rather  reserve  one  pair  than 
accept  so  low  a  price  for  it  as  13,  he  can  then 
disregard  the  estimate  of  the  twelfth  would-be 
purchaser  just  as  he  previously  disregarded  all 
lower  estimates.  The  final  utility  which  would 
then  become  operative  is  that  of  the  eleventh 
customer,  for  whom  shoes  have  a  final  utility  of 
i24+23  +  22  +  2i  +  20-|-i9  +  i8+i7+i6+i54-i4-M3=222. 


172  ECONOMICS 

14.  The  eleven  pairs  now  to  be  sold  will  bring 
II  X  14,  or  154,  nearly  as  much  as  was  obtained 
for  the  twelve  pairs.  In  the  actual  course  of 
business  it  is  often  found  that  the  total  value 
of  a  stock  is  increased  by  the  withholding  of  a 
small  part  of  the  supply.  The  reason  is  that 
a  larger  multiplicand  is  obtained  by  the  rise  in 
final  utility. 

The  only  modification  of  this  account  of  the 
process  by  which  market  values  are  determined 
necessary  to  make  it  fit  the  normal  operations 
of  the  market,  is  the  fuller  development  of  the 
idea  of  supply.  The  supply  of  a  commodity  is 
not  as  a  rule  in  the  hands  of  a  single  dealer  and 
it  is  not  definitely  fixed  in  amount.  For  the 
moment  the  supply  of  any  given  commodity 
may  be  fixed  by  physical  causes.  The  abun- 
dance or  the  meagreness  of  a  harvest,  the  success 
or  failure  of  a  fishing  expedition,  the  possession 
or  the  lack  of  suitable  capital,  or  other  causes, 
may  determine  the  amount  of  the  commodity  to 
be  offered  for  sale.  But  looking  over  a  longer 
period,  it  will  be  recognized  that  these  agencies 
can  be  controlled  in  large  part,  and  at  any  rate 
energies  can   be  diverted  from  one  channel  to 


VALUE  173 

another  in  such  way  as  to  increase  to  almost 
any  extent  desired  the  supply  of  any  single 
commodity.  Whether  this  will  be  done  depends 
upon  whether  there  is  a  sufficient  motive,  — 
the  probability  of  a  sufficient  reward.  The 
amount  of  the  reward  depends  upon  the  final 
utility  of  the  commodity  in  question  to  con- 
sumers. If  there  are  many  persons  for  whom 
it  has  a  steady,  high  final  utiHty,  the  supply  will 
be  governed  by  this  fact. 

"Here,  then,  we  reach  the  fundamental  cause  of 
value,  and  the  ultimate  fact  of  which  the  science 
of  economics  need  take  account,  —  the  clue 
which  may  unravel  the  bewildering  maze  of 
economic  society.  The  making  of  goods,  the 
efficiency  of  production,  the  direction  which 
industry  takes,  the  comparative  efficiency  of 
different  economic  societies,  the  interchange  of 
products,  markets,  commerce,  credit,  value,  the 
rewards  to  producers  determined  by  the  relative 
values  of  different  products,  —  all  these  impor- 
tant phenomena  fall  into  orderly  relation  if  we 
start  with    the   final    utility  of   goods  ^  to  con- 

^  Not  their  market  value.  This  is  determined  by  two  ele- 
ments, final  utility  and  supply. 


1/4  ECONOMICS 

sumers.  It  is  true  that  changes  are  continuall}'- 
taking  place  in  the  final  utilities  of  commodities, 
and  it  is  important  that  we  should  understand 
their  cause  and  method  of  variation.  But  it 
is  even  more  important  that  we  should  fully 
appreciate  their  pivotal  character  and  far-reach- 
ing consequences. 

Changes  in  the  final  utility  of  a  commodity 
to  individuals  do  not  affect  the  supply  until 
they  become  so  permanent  and  extensive  as  to 
influence  the  makers  of  goods,  as  distinct  from 
those  who  have  stocks  on  hand  in  the  markets. 
But  speaking  only  of  such  extensive  changes, 
and  regarding  the  power  of  society  as  fixed,  we 
may  say  that  final  utility  to  a  large  extent  deter- 
mines the  supply.  If  steel  acquires  a  higher 
utility  by  a  discovery  of  important  new  uses  to 
which  it  can  be  put,  productive  power  is  turned 
in  that  direction  and  its  supply  is  increased.  A 
multitude  of  economic  relations  are  modified  by 
the  change.  Credit,  fixed  capital,  circulating 
capital,  the  market  for  steel,  the  market  for 
commodities  of  which  steel  is  a  component 
element,  the  market  for  commodities  desired 
by  the  producers  of  steel,  and  countless  other 


VALUE  175 

phenomena,  undergo  more  or  less  modifica- 
tion—  all  these  influences  originating  in  the 
change  in  the  final  utilities  of  the  commodities 
affected. 

Market  value  is  ascertained,  not  by  observing 
the  descending  scale  of  estimates  made  by  all 
possible  communities,  but  by  measuring,  along 
this  scale,  the  quantity  which  producers  finally 
decide  to  place  upon  the  market.  Wherever 
that  quantity  reaches,  there  on  the  scale  is  the 
precise  final  utility  which  determines  market 
value.  If  the  wants  of  men  remain  unchanged 
in  character  and  intensity,  the  market  value  is 
fixed  by  a  simple  calculation  of  the  supply.  If 
wants  change,  a  temporary  but  sometimes  seri- 
ous misadjustment  may  arise  between  the  sup- 
ply and  the  anticipated  rewards  to  producers. 
It  may  be  found  that  a  largely  increased  supply 
is  met  by  a  large  reduction  in  the  number  of 
persons  for  whom  the  commodity  possesses  any 
high  degree  of  final  utility.  The  value,  unless 
the  stock  is  of  such  a  nature  that  it  can  be  with- 
held from  the  market  indefinitely;  may  sink  so 
low  that  it  does  not  cover  the  costs  of  produc- 
tion.    On  the  other  hand,  a  shrewd  producer 


176  ECONOMICS 

may  bring  a  large  stock  at  the  precise  time 
when  final  utility  is  rapidly  rising,  or  he  may 
induce  the  rise  by  his  own  skilful  advertising, 
leading  people  to  attach  an  altogether  new  im- 
portance to  the  want  which  the  article  is  de- 
signed to  satisfy.  Notwithstanding  his  utmost 
efforts  in  production,  he  may  not  be  able  to  sat- 
isfy even  all  of  the  consumers  whose  estimate 
of  the  article  is  sufficiently  high  to  reward  his 
efforts.  If  the  article  is  one  protected  by  patent 
or  copyright,  or  some  natural  monopoly,  the 
final  utility  may  long  remain  near  the  initial 
utility,  bringing  great  rewards  to  producers,  and 
leaving  very  little  margin  between  utilities  and 
values. 

The  market  value  of  any  commodity,  then,  is 
determined  by  its  final  utility  to  the  last  con- 
sumer, whose  cooperation  is  necessary  to  ex- 
haust the  supply ;  or,  to  be  more  accurate,  since 
this  last  consumer,  like  any  of  the  earlier  ones, 
may  demand  more  than  one  increment  of  the 
commodity,  and  so  count  in  connection  with 
more  than  a -single  unit  of  consumption,  it  is 
determined  by  the  final  utility  of  the  last  por- 
tion placed  upon  the  market.     If  there  are  any 


VALUE  177 

reservations  in  the  minds  of  sellers  as  to  the 
point  below  which  they  are  unwilling  to  allow 
the  value  to  fall,  then  to  that  extent  their  own 
estimate  must  be  included  in  precisely  the  same 
way  as  that  of  other  buyers.  If  all  of  the  sup- 
ply is  not  taken  by  persons  to  whom  it  has  a 
higher  final  utility,  it  is  the  final  utility  to  its 
owner  that  determines  the  value  of  what  remains. 


CHAPTER   X 

THE    DISTRIBUTION    OF    PRODUCTS 

The  chapters  immediately  preceding  have 
dealt  with  the  abstract  laws  of  consumption, 
prosperity,  and  value.  It  is  now  time  to  return 
to  the  more  concrete  facts  of  industrial  society, 
in  order  to  trace  the  operation  of  economic 
forces  in  the  actual  exchange  of  goods  from 
hand  to  hand. 

Nature  deals  very  unequally  with  the  regions 
of  the  earth  in  the  distribution  of  the  various 
sources  of  wealth.  If  man  in  each  region  were 
dependent  entirely  upon  the  goods  that  he  finds, 
he  would  be  fed  and  clothed  and  sheltered  in 
curious  fashions.  As  we  have  seen,  man  makes 
goods  as  well  as  finds  them.  At  first  thought 
it  might  seem  that  this  power  of  making  goods 
would  of  itself  rectify  the  inequalities  of  nature 
in  the  disposition  of  her  free  goods,  since  man 
would  be  able  to  make  on  any  given  spot  the 
things  of  which  nature  has  been  niggardly  in 
178 


THE  DISTRIBUTION   OF  PRODUCTS  1 79 

her  supply.  If,  however,  we  recall  clearly  what 
is  meant  by  the  making  of  goods,  it  will  be  seen 
that  so  far  from  rectifying  in  this  manner  the 
inequalities  of  nature,  man's  industry  tends 
rather  to  increase  them.  Industry  is  dependent 
upon  nature  for  its  materials.  The  making  of 
goods  is  only  the  increasing  of  the  number  of 
goods  and  the  increasing  of  the  regularity  of 
their  supply.  If  we  bring  in  no  other  consider- 
ations, what  we  must  say  of  man's  activity  in 
the  making  of  goods  is  that  it  produces  more 
fruit  where  nature  produces  some  fruit,  that  it 
turns  to  account  the  flesh  of  animals  where  ani- 
mals are  to  be  found,  that  it  unearths  minerals 
from  the  natural  mineral  deposits,  that  it  in- 
creases by  cultivation  the  crops  of  grain  which 
are  found  growing  wild.  Evidently  all  this  only 
emphasizes,  and  does  not  correct,  the  irregulari- 
ties in  the  natural  distribution  of  minerals, 
grain,  fruit,  and  animal  products. 

Surrounded  by  superfluous  quantities  of  the 
goods  which  exist  spontaneously,  or  are  easily 
made,  the  inhabitants  of  each  region  are  de- 
prived of  the  means  of  gratifying  their  most 
rudimentary  wants  in  other  directions.     Hunters 


l80  ECONOMICS 

in  cold  regions  slay  the  wild  animals  of  their 
chase  for  a  small  quantity  of  food,  and  throw- 
aside  their  skins,  being  already  well  supplied 
with  skins,  and  the  greater  part  of  its  flesh  ;  but 
they  suffer  severely,  it  may  be,  for  lack  of  salt, 
for  iron,  and  other  commodities  which  their 
environment  does  not  provide.  African  savages 
may  remain  in  the  most  abject  poverty  notwith- 
standing the  ease  with  which  they  might  supply 
themselves  with  precious  ivory.  A  profusion  of 
tropical  fruits  does  not  bring  any  great  amount 
of  real  wealth  to  the  indolent  natives  of  equa- 
torial regions.  Nor  even  if  their  indolence  gave 
way  to  the  most  enterprising  and  vigorous  indus- 
try, in  the  gathering  and  preservation  of  those 
fruits  and  other  products  which  nature  gives 
them,  would  that  industry  be  of  any  avail  to 
raise  their  standard  of  civilization,  or  to  insure 
them  a  comfortably  independent  and  normal 
existence.  Midas,  starving  in  the  midst  of  his 
gold,  is  not  poorer  than  any  community  which 
is  dependent  for  its  goods,  and  for  the  materials 
of  its  industry,  upon  the  resources  of  its  own 
local  environment. 

This  is  not  yet  the  whole  truth.      Industry 


THE   DISTRIBUTION   OF  PRODUCTS  l8l 

not  only  does  not  of  itself  correct  the  inequali- 
ties of  nature,  but  it  gives  rise  to  others  which 
in  turn  are  quite  as  much  in  need  of  correction. 
The  industrial  characteristics  of  man  show  di- 
versities almost  as  great  as  those  of  the  physical 
world.  These  diversities  are  often  parallel  with 
the  diversities  in  natural  products  and  make  the 
differences  in  the  industrial  product  more  strik- 
ing than  they  would  be  if  men  of  the  same  type 
were  to  be  found  everywhere.  It  may  be  that 
the  differences  in  men  are  due  to  the  same 
underlying  causes  as  the  differences  in  natural 
products.  However  this  may  be,  both  sets  of 
differences  exist,  and  they  may  at  times  partly 
counteract  each  other,  while  at  other  times  their 
effort  is  cumulative.  If  Japanese  turn  their 
attention  to  the  occupations  which  they  find 
agreeable  and  natural,  they  will  make  goods  of 
a  different  sort  from  those  that  would  be  most 
easily  produced  by  Russians  or  French,  and  this 
would  be  so,  even  if  exactly  the  same  natural 
materials  were  within  reach  of  all  nations.  The 
industrial  characteristics  of  the  negro  are  still 
observable  in  this  country,  as  are  also  those  of 
the  Chinese,  the  Italians,  the  Germans,  and  the 


1 82  ECONOMICS 

Irish.  If  any  one  of  these  nations  were  put  in 
easy  contact  with  every  variety  of  natural  prod- 
uct upon  the  globe,  and  given  free  opportunity 
to  gather  materials  of  every  sort,  it  would  still 
fail  to  make  certain  kinds  of  goods  that  would 
be  first  produced  by  some  one  of  the  others. 
Of  the  commodities  which  the  first  nation  would 
include  in  its  total  production  there  would  be 
many  of  inferior  quality,  as  compared  with  simi- 
lar products  of  the  other  countries.  The  general 
tendency  of  these  differences  in  the  industrial 
qualities  of  different  communities  is  to  increase 
the  number  of  superfluous,  and  hence  relatively 
worthless  commodities,  and  to  diminish  the 
number  of  many  others  that  might  be  provided 
from  the  materials  at  hand  if  there  were  the 
requisite  ability  to  utilize  them. 

There  is  still  a  third  principle  operating  in 
the  same  direction  with  the  two  that  have  been 
mentioned,  viz.,  the  division  of  trades,  or,  as  it 
is  frequently  but  less  accurately  called,  the 
division  of  labor.  In  the  development  of  in- 
dustry it  is  found  advantageous  for  the  mem- 
bers of  each  community  to  separate  themselves 
into  distinct  trades  or  occupations.     The  chief 


THE  DISTRIBUTION  OF  PRODUCTS  1 83 

economy  resulting  from  this  arrangement  is 
that  it  permits  each  producer  to  devote  himself 
to  the  particular  tasks  for  which  he  is  best 
fitted  by  disposition  and  training.  Not  that 
this  result  is  by  any  means  always  secured,  but 
division  of  labor  tends  to  secure  it.  There  are 
certain  occupations  which  demand  great  physi- 
cal endurance.  Under  free  competition  those 
who  have  the  necessary  endurance  will  naturally 
succeed  best  in  those  industries,  and  will  gradu- 
ally drive  out  others  who  are  not  so  well  fitted. 
Other  occupations  require  manual  dexterity,  and 
the  law  of  evolution  will  gradually  eliminate  all 
who  do  not  have  the  capacity  for  acquiring  the 
necessary  degree.  There  are  still  other  occupa- 
.tions  in  which  lightness  and  delicacy  of  touch 
are  the  chief  requisites.  Generally  it  is  a  pecul- 
iar combination  of  qualities  rather  than  the 
predominance  of  any  one  that  is  demanded,  and 
mental  qualities  are  even  more  decisive  in  most 
instances  than  physical  qualities.  By  calling 
to  higher  occupations  those  who  have  superior 
or  happily  blended  qualities,  the  division  of 
labor  permits  much  good  worlc  to  be  done  by 
persons    less   liberally   endowed   with    physical 


1 84  ECONOMICS 

strength  or  mental  capacity,  but  still  able  to 
compete  for  certain  kinds  of  work. 

Besides  apportioning  producers  in  this  man- 
ner to  different  tasks  in  accordance  with  their 
natural  capacity,  the  division  of  labor  is  of 
advantage  in  that  it  permits  a  great  develop- 
ment of  specialized  skill.  Constant  repetition 
of  the  same  processes  will  produce  a  high 
degree  of  efficiency,  even  where  efficiency  is 
at  first  very  moderate.  Precision  and  speed 
can  be  gained  by  the  average  worker  only  by 
confining  the  attention  to  comparatively  few 
operations.  Practice  is  necessary  for  perfect 
work  in  the  best  of  workers,  and  it  secures 
from  the  great  body  of  workers,  if  not  perfec- 
tion, at  least  a  very  efficient  total  production  of 
goods. 

'  But  again  it  will  be  noticed  that  if  the  com- 
munity is  self-contained,  depending  for  its  in- 
dustry, thus  organized  upon  the  principle  of  the 
division  of  labor,  upon  the  materials  which  its 
members  can  extract  from  the  particular  portion 
of  the  earth's  crust  with  which  they  are  in 
contact,  the  evils  flowing  from  the  unequal 
distribution  of  natural  products  and  the  unequal 


THE  DISTRIBUTION   OF   PRODUCTS  1 8$ 

physical  and  mental  equipment  of  men  are  not 
remedied  by  such  a  division  of  labor.  The 
hunters,  after  a  division  of  labor,  may  prepare 
the  skins  of  wild  animals  with  less  difficulty 
and  in  larger  quantities,  but  the  relative  quanti- 
ties of  the  goods  which  they  had  in  abundance 
have  been  increased  by  every  extension  of  the 
principle  of  division  of  labor,  and  similar  results 
follow  its  adoption  in  communities  of  other 
varieties. 

We  have  assumed  thus  far  in  the  present 
chapter  that  the  smallest  industrial  unit  is 
the  local  community  —  large  enough  to  permit 
within  itself  a  certain  degree  of  division  of 
labor,  and  to  secure  some  degree  of  control  over 
the  forces  of  nature;  that  this  community, 
owing  allegiance  to  the  patriarch  or  oldest 
member,  and  consisting  only  of  his  descendants 
and  those  who  have  been  adopted  from  other 
families  by  marriage,  has  somewhat  clearly 
marked  characteristics,  showing  a  preference  for 
certain  products  and  certain  kinds  of  activity. 
Such  a  community  will  be  able  to  provide  for  its 
absolute  necessities,  and  it  will  usually  possess  an 
abundance  of  some  one  or  more  kinds  of  wealth. 


1 86  ECONOMICS 

If  these  particular  commodities,  which  are  ob- 
tained from  the  environment  at  little  cost,  are 
not  produced  in  great  profusion,  it  is  only 
because  their  marginal  utility  more  quickly 
falls  to  the  level  of  the  marginal  utility  of  other 
commodities  which,  although  with  greater  dif- 
ficulty, they  still  think  it  worth  their  while  to 
produce. 

In  such  a  community,  as  in  every  other,  there 
would  be  a  desire  to  equalize  the  final  incre- 
ments of  consumption.  Labor  cannot  be  spent 
exclusively  upon  the  goods  which  are  produced 
most  easily,  since,  if  the  community  has  ad- 
vanced far  enough  to  have  any  diversity  of 
wants,  it  must  spend  its  energies  chiefly  upon 
increasing  the  supply  of  the  products  which,  in 
their  environment,  are  scarce.  In  any  division 
of  labor  which  takes  place,  disproportionate 
attention  must  be  given  to  the  least  remunera- 
tive tasks.  Their  own  industrial  qualities  may 
or  may  not  mitigate  the  difficulties  imposed  by 
their  lot,  but  at  best  they  derive  no  advantage 
from  the  lavish  gifts  of  nature,  which  are  offset 
by  such  rigorous  conditions  in  the  production 
of  other  and  no  less  necessary  goods. 


THE  DISTRIBUTION  OF  PRODUCTS  1 8/ 

It  would  require  very  limited  intelligence  in- 
deed to  discover  that  it  would  be  of  advantage 
for  two  such  local  communities  to  come  into 
contact  with  each  other,  in  order  that  they 
might  exchange  products.  The  enormous  gain 
from  such  contact  would  not  be  so  obvious  to 
the  communities  on  their  first  contact,  as  it  is 
to  us,  for  the  reason  that  each  community  hav- 
ing extended  its  production  in  all  the  directions 
for  which  it  has  discovered  any  wants,  is  not 
ordinarily  conscious  of  superfluity  in  any  prod- 
ucts. If,  at  the  moment  of  contact,  both  have 
by  some  accident  accumulated  more  than  their 
normal  portion  of  the  products  which  are  easily 
obtained,  or  if  each  is  suffering  from  the  lack  of 
a  commodity  with  which  the  other  is  supplied, 
or  if,  again,  either  makes  clear  to  the  other  that 
it  is  in  the  possession  of  commodities  of  some 
sort  which  are  unknown  to  the  other  and  have 
the  power  of  adding  a  new  enjoyment,  then 
some  kind  of  commerce  in  the  superfluous  or 
the  new  commodity  is  likely  to  begin. 

It  will  naturally  begin  with  barter,  i.e.^  with 
the  direct  exchange  of  one  commodity  for  an- 
other, each  community  parting  with  the  com- 


1 88  ECONOMICS 

modity  which  it  can  secure  upon  the  easiest 
terms,  for  any  which  is  either  entirely  beyond 
its  reach,  or  is  obtainable  from  its  own  environ- 
ment only  with  difficulty.  When  such  ex- 
changes have  once  begun,  they  tend  to  increase 
with  ever  accelerating  velocity.  The  super- 
fluity, which  comes  once  as  the  unforeseen  gift 
of  Providence,  will  be  secured  in  the  future  by 
conscious  effort.  The  equalizing  of  the  incre- 
ments of  consumption  will  henceforth  be  se- 
cured, not  by  apportioning  effort  directly  in 
accordance  with  marginal  utility,  but  by  ex- 
changing for  other  commodities  that  com- 
modity whose  utility  is  brought  below  the 
margin  of  consumption  by  its  abundance.  This 
readjustment,  by  increasing  the  total  number 
of  goods  consumed,  may  raise  the  margin  of 
consumption,  thus  giving  a  higher  utility  to  the 
last  increment  of  each  good  consumed. 

We  are  thus  brought  again  to  one  of  the 
most  important  questions  in  economics,  the  one 
perhaps  about  which  there  has  been  more  dis- 
cussion than  about  any  other,  but  to  which  we 
have  already  given  the  answer  in  the  preceding 
chapter.     Upon  what  terms  are  the  communi- 


THE  DISTRIBUTION   OF  PRODUCTS  1 89 

ties  to  exchange  their  products  ?  Each  has 
commodities  with  which  it  is  willing  to  part. 
Each  has  learned  to  desire  commodities  which 
the  other  is  disposed  to  give  in  exchange. 
How  shall  they  agree  upon  the  terms  of  ex- 
change ?  This  is  the  question  of  value,  and  the 
answer  is  the  same  whether  the  exchange  is 
between  individuals  or  between  nations.  Each 
community  values  its  goods  in  accordance  with 
their  marginal  utility ;  but  all  communities  ex- 
cept that  which  obtains  the  least  marginal  util- 
ity will  receive  in  the  intercommunal  exchange 
more  than  its  own  marginal  utility,  for  it  is  the 
marginal  pair  whose  estimates  are  decisive  in 
determining  the  actual  rate  of  exchange.  If 
there  are  but  two  parties  to  a  given  exchange, 
the  rate  is  determined  by  the  amount  that  each 
must  give  up  in  order  to  equalize  the  marginal 
increments  of  its  own  consumption.  When 
either  of  the  two  communities  finds  that  the 
marginal  utility  of  the  commodity  which  it  is 
receiving  no  longer  exceeds  that  which  it  gives 
in  exchange,  the  barter  will  cease,  even  though 
the  other  is  willing  that  it  should  continue.  An 
error  of  judgment  on  either  side  may  force  the 


1 90  ECONOMICS 

continuance  of  an  unfavorable  exchange,  but 
even  with  primitive  races  such  errors  would  be 
less  common  than  might  at  first  be  supposed. 
It  is  not  impossible  even  for  a  savage  to  tell 
whether  a  week's  labor  will  be  more  remunera- 
tive, if  spent  in  securing  more  of  the  commodity 
than  others  produce,  than  if  spent  in  the  sort  of 
activity  of  which  he  secures  the  benefit  directly. 
It  is  obvious  that  barter,  or  direct  exchange 
of  the  kind  that  has  been  described,  has  defi- 
nite and  quickly  reached  limitations  whether 
between  communities,  or,. in  a  society  of  a  dif- 
ferent kind,  between  individuals.  Historically, 
commerce  is  a  growth,  and  whenever  they  have 
been  reached,  limitations  have  been  removed  in 
various  ways ;  but  it  will  aid  in  appreciating  the 
necessity  of  various  features  of  our  present 
complicated  commercial  organization  if  we  try 
to  picture  the  difficulties  involved,  in  making 
the  exchanges  with  which  we  are  familiar,  by  a 
system  of  barter.  Those  who  have  surplus 
commodities  of  any  particular  sort  will  not 
readily  fall  in  with  others  who  desire  them,  and 
who,  at  the  same  time,  possess  other  commodi- 
ties that  are  acceptable  in  exchange.     The  im- 


THE  DISTRIBUTION  OF  PRODUCTS  19I 

probability  of  this  double  coincidence  is  so 
great  that  it  would  at  once  cut  off  nine-tenths 
of  our  present  exchanges,  leaving  only  the  rude 
trading  of  regular  farmers  or  hunters. 

A  second  difficulty  would  be  found  in  the 
fact  that  the  commodities  to  be  exchanged 
would  not  have  units  of  equal  value.  An 
ivory  tusk,  a  bundle  of  skins,  a  horse  and 
saddle,  may  each  have  a  pretty  clearly  defined 
value,  i.e.,  a  clearly  defined  importance  in  the 
general  aggregate  of  commodities  which  make 
up  the  total  consumption  of  an  individual, 
while  there  is  still  difficulty  in  making  advan- 
tageous exchanges,  because  there  is  no  con- 
venient way  of  expressing  that  value  in  a 
unit  recognized  in  all  the  communities  that 
have  commercial  relations. 

Practically  neither  of  these  obstacles  would 
long  stand  in  the  way  of  commercial  progress. 
A  unit  of  value  is  in  use  almost  as  soon  as 
there  is  any  consciousness  of  the  phenom- 
enon of  value.  Whatever  commodity  in  any 
community  is  especially  esteemed  because  of 
its  importance  in  their  daily  life,  or  because 
of    some    particularly   attractive    qualities,    be- 


192  ECONOMICS 

comes  the  standard  of  value ;  and  the  value 
of  all  other  commodities  is  intuitively  ex- 
pressed in  terms  of  that  standard.  Cattle 
and  sheep,  tobacco,  wampum,  iron,  copper 
and  silver,  and  many  other  commodities,  have 
served  this  purpose.  Instinct  and  reason 
have  united  to  dictate,  at  each  period,  and 
for  each  people,  the  commodity  which  was 
best  suited  to  serve  as  a  standard  of  value, 
and  the  rule  is  that  it  is  one  whose  margi- 
nal utility  rises  or  falls  with  that  of  the  bulk 
of  commodities  in  use,  whose  marginal  utility 
is  therefore  a  fairly  accurate  expression  of 
the  margin  of  consumption  of  the  people  who 
use  it.  If  two  communities  with  different 
standards  come  into  contact,  there  may  be 
some  friction  in  adjusting  exchanges  at  first, 
but  if  permanent  relations  are  established, 
the  better  of  the  two  standards  will  gradually 
displace  the  other,  and  will  become  the  ordi- 
nary standard  of  both  communities. 

When  a  standard  of  value  has  thus  been 
established,  the  necessity  of  double  coinci- 
dence in  barter  is  also  obviated.  He  who 
desires  any  particular  commodity   can   always 


THE   DISTRIBUTION   OF   PRODUCTS  1 93 

obtain  it,  if  he  is  able  to  offer  the  requisite 
number  of  units  of  the  commodity  which  is 
accepted  as  the  standard.  In  disposing  of 
his  own  surplus  goods  he  has  therefore  to 
look,  not  for  persons  who  have  the  com- 
modity that  he  desires,  but  only  for  some 
person  who  is  supplied  with  the  standard 
commodity.  This  will  be  an  easy  task,  since 
every  one  who  expects  to  purchase  his  goods 
will  have  supplied  himself  with  the  commodity 
which  he  knows  will  be  acceptable  in  exchange. 
Awkward  as  it  may  be  to  carry  around  quan- 
tities of  tea,  strings  of  wampum,  or  bottles 
of  olive-oil,  or  to  drive  a  herd  of  oxen  to  the 
market-place  as  a  condition  of  making  pur- 
chases, it  would  be  more  economical  for  the 
producer,  than  for  him  to  spend  still  more 
time  in  finding  a  purchaser  who  happens  to 
be  supplied  with  the  goods  that  he  wants. 

This  cumbrous  method  of  making  exchanges, 
though  a  great  improvement  over  direct  bar- 
ter, is  readily  simplified  by  the  next  step  in 
advance.  If  three  persons  have  obtained  an 
ox  in  exchange  for  some  commodity  that  they 
have   produced  in  common,  and   they  wish  to 


194  ECONOMICS 

divide,  each  taking  his  own  share,  it  will  evi- 
dently be  necessary  to  slay  the  ox,  and  divide 
the  carcass,  —  a .  process  which  may  involve 
loss  of  value.  If  a  person  has  two  exchanges 
of  equal  amount  to  make  in  a  distant  village, 
one  a  purchase  and  the  other  a  sale,  it  will 
evidently  be  an  annoying  and  needless  task 
for  him  to  take  the  tobacco,  or  tea,  or  oxen, 
to  the  village  and  back  again.  Both  of  these 
wasteful  processes,  and  many  others  besides, 
may  be  avoided  if,  when  exchanges  are  made, 
a  representative  of  the  value  standard  can 
be  passed  from  hand  to  hand,  instead  of  the 
actual  commodity  which  constitutes  the  stand- 
ard. This  sensible  arrangement  is  very  soon 
discovered  and  utilized.  When  we  read  that 
tobacco  served  the  early  Virginians  as  a  me- 
dium of  exchange,  we  must  not  suppose  that 
so  many  pounds  of  tobacco  were  actually 
delivered  in  bulk  in  every  purchase.  The 
tobacco  which  was  thus  used  was  ordinarily 
safely  stored  in  a  warehouse,  and  the  owner- 
ship of  it  only  was  transferred  when  an  ex- 
change was  made,  the  owner  of  the  tobacco 
giving   a   written    order   or   certificate    to    the 


THE  DISTRIBUTION   OF   PRODUCTS  1 95 

owner  of  the  commodity  which  is  given  over 
in  exchange  for  it. 

The  name  given  to  any  commodity  which 
thus  serves  a  community  as  its  standard  of 
value  is  money.  If  the  commodity  happens 
to  be  suitable  for  general  circulation,  it  passes 
from  one  person  to  another  with  every  ex- 
change of  goods.  If  not,  or  if  it  is  desired 
to  economize  the  standard  commodity,  its 
representative  is  thus  used.  This  representa- 
tive may  have  a  value  because  of  its  own 
utility,  or  its  value  may  lie  only  in  its  repre- 
sentative capacity.  Gold  when  first  introduced 
may  not  have  been  money,  but  the  representa- 
tive of  money.  It  is  asserted  that  the  first 
coins  were  in  the  form  of  animals,  indicating 
that  they  were  substitutes  for  cattle. 

The  gradual  increase  in  the  use  of  money, 
and  the  substitution  of  superior  for  inferior 
kinds  of  money,  are  prominent  features  of 
the  early  stages  of  the  growth  of  commerce. 
But  we  must  guard  against  the  danger  of 
exaggerating  their  importance.  Money  is  in- 
dispensable as  an  agency  of  commerce,  but 
it  is  an  agency  which  men  hit  upon  naturally, 


196  ECONOMICS 

and  which  acts  all  but  automatically  when  it 
has  once  been  introduced.  The  causes  of 
commerce  lies  in  the  differences  in  the  natural 
conditions  of  the  various  regions,  giving  rise 
to  a  diversity  of  natural  products ;  in  the 
differences  among  various  races  and  commu- 
nities, giving  rise  to  a  diversity  of  industries ; 
and  in  the  division  of  labor,  giving  rise  to  a 
further  diversity  of  industrial  products.  The 
interchange  of  commodities  permits  producers 
to  reap  the  benefit  of  their  natural  and  indus- 
trial advantages,  and  to  obviate  the  necessity 
of  resorting,  in  any  particular  region,  to  those 
features  of  the  environment  that  yield  but 
scanty  return  to  labor. 

Commodities  within  each  community  are 
valued  in  accordance  with  their  marginal  util- 
ity, the  production  of  each  ceasing  as  soon  as 
its  utility  has  fallen  to  that  of  the  other  com- 
modities entering  into  the  consumption.  But 
the  production  of  any  such  commodity  may  be 
extended  indefinitely  if,  instead  of  being  wholly 
dependent  for  its  value  upon  its  actual  con- 
sumption within  the  community,  it  may  be 
exchanged    for    new    goods    whose    utility    is 


THE  DISTRIBUTION   OF   PRODUCTS  1 97 

above  the  margin  of  consumption.  If  there 
are  many  such  goods  obtainable,  and  their 
initial  utility  is  great,  it  may  even  become 
practicable  to  give  up  the  consumption  of  the 
last  portions  of  many  goods  which  had  been 
consumed,  and,  at  least  temporarily,  to  raise 
the  margin  of  consumption  to  a  higher  level. 
Labor  would  be  expended  in  the  production 
of  fewer  commodities ;  but  a  larger  number 
would  be  consumed  and  the  marginal  utility 
of  each  would  be  higher.  Every  article  con- 
sumed, including  those  of  which  the  surplus 
is  exchanged,  would  thus  have  a  higher  sub- 
jective value  than  before  commerce  began. 

In  order  that  commerce  may  be  carried  on 
at  all  advantageously,  there  must  be  a  con- 
siderable degree  of  mutual  confidence  be- 
tween traders.  Goods  cannot  be  brought  to  a 
market  to  be  exposed  for  sale  unless  there  is 
a  somewhat  stable  social  condition.  Tribes 
that  are  at  war,  or  are  in  constant  fear  of 
treachery,  cannot  conveniently  exchange  their 
products,  and  the  gradual  development  of  com- 
merce is  closely  connected  with  the  develop- 
ment  of    credit.     A   low   degree   of   credit    is 


198  ECONOMICS 

presupposed  in  barter,  more  is  needed  in  a 
system  of  representative  money,  and  its  com- 
plete supremacy  is  required  when  commerce 
has  extended  to  distant  lands,  and  goods  are 
sent  great  distances  without  the  personal  escort 
of  their  owners. 

The  introduction  of  improved  methods  of 
transportation  is  one  of  the  most  powerful 
agencies  in  the  development  of.  commerce  in 
its  modern  form.  Goods  cannot  be  exchanged 
on  any  large  scale  while  they  must  be  carried 
by  human  beings,  or  by  beasts  of  burden,  for 
the  reason  that  their  value  does  not  justify  the 
expense.  Water  transportation  is  cheaper,  and 
accordingly  the  first  commerce  of  any  magni- 
tude is  between  the  different  ports  of  inland 
seas,  where  the  dangers  of  navigation  are  com- 
paratively slight,  and  its  economy  sufficient  to 
permit  exchanges.  Canals  bring  the  benefits 
of  water  transportation  to  interior  regions,  and 
a  combination  of  water  route  with  a  short  land 
route  over  which  goods  are  carried  in  caravans, 
finally  unites  places  that  are  remote  in  distance. 
But  until  very  recent  times  the  contact  was 
only  occasional,  and  had  but  little  effect  upon 


THE  DISTRIBUTION  OF   PRODUCTS  1 99 

the  general  welfare  of  the  inhabitants  of  the 
regions  thus  brought  into  relation.  In  Europe, 
throughout  the  Middle  Ages,  exchanges  were 
ordinarily  confined  to  the  different  trades,  or 
guilds,  of  a  single  locality.  The  new  demand 
for  foreign  luxuries  is  the  most  marked  charac- 
teristic of  the  revolution  of  industry  and  com- 
merce at  the  beginning  of  the  sixteenth 
century. 

Throughout  the  next  three  hundred  years 
commerce  steadily  advanced  in  importance  as  a 
feature  of  the  economic  life  of  Europe  and 
America,  and  within  the  present  century  it  has 
become  far  more  important  than  ever  before. 
The  application  of  steam  to  ocean  and  river  nav- 
igation and  to  the  steam  railway  have  worked 
a  commercial  revolution  in  the  second  half  of 
the  century.  At  the  beginning  of  the  century, 
the  growth  of  the  factory  system,  with  its  con- 
sequent extension  of  the  principle  of  division 
of  labor,  had  accomplished  what  is  known  as  the 
industrial  revolution  ;  but  it  had  also  its  effect 
upon  the  development  of  commerce.  It  in- 
creased the  number  of  the  cheaply  manufactured 
goods,  which,  if  we  consider  only  the  needs  of 


200  ECONOMICS 

the  communities  that  make  them,  are  superflu- 
ous and  of  little  utility,  but  which,  in  a  country 
with  extensive  commercial  relations,  are  really 
or  partly  finished  commodities,  since  they  are 
made  not  for  themselves,  but  for  the  sake  of  the 
goods  which  they  will  bring  in  exchange. 

The  later  revolution  exhibits  the  development 
of  a  network  of  railways  and  steamship  lines 
binding  together  all  parts  of  the  world,  bringing 
Europe  and  America  within  a  week  of  each 
other,  and  making  it  possible  for  each  city  to 
obtain  from  a  distance,  not  merely  spices  and 
such  few  other  goods  as  have  great  value  com- 
pressed into  a  small  bulk,  but  even  its  food 
supplies,  the  materials  used  in  the  erection  of 
its  houses,  and  the  materials  from  which  it 
manufactures  its  clothes.  The  extent  of  the 
revolution  effected  by  the  new  methods  of 
transportation  is  illustrated  by  the  fact  that  a 
bushel  of  wheat  may  be  shipped  from  Minne- 
apolis to  London,  only  a  very  small  part  of  its 
value  being  used  up  in  the  expense  of  trans- 
portation, but  that  wheat  cannot  be  hauled  to 
Minneapolis  by  wagon  from  a  village  twenty 
miles  distant  because  of  the  expense. 


THE   DISTRIBUTION   OF  PRODUCTS  20I 

There  is  one  very  important  feature  of  the 
organization  of  commerce  of  which  we  have 
not  yet  given  an  account,  although  in  order 
of  development  it  belongs  earlier  than  the  more 
striking  features  of  the  improvement  in  trans- 
portation facilities.  Reference  has  been  made 
to  the  possible  difficulty  of  the  early  producer 
in  finding  purchasers  for  his  product,  who  are 
supplied  with  the  commodities  that  he  desires. 
This  difficulty  is  met  by  the  use  of  som*^  one 
commodity  which  all  agree  to  accept  as  a  me- 
dium of  exchange.  With  this  difficulty  out  of 
the  way,  the  producer  may  next  encounter  one 
which  is  more  fundamental.  He  may  not  suc- 
ceed in  finding  a  purchaser  at  all.  And  yet 
purchasers  may  be  quite  as  anxious  to  find  the 
supply,  as  the  producer  is  that  they  should. 
Coincidence  of  buyers  and  sellers  is  not  so 
difficult  as  the  double  coincidence  requisite  in 
barter,  but  it  may  still  be  so  difficult  that  a 
disproportionate  amount  of  time  is  necessarily 
spent  in  marketing  products. 

A  device  intended  to  remedy  this  is  the  set- 
ting apart  of  a  specified  building,  or  open  square, 
in   each  village,  to  which,  upon  specified  days, 


202  ECONOMICS 

all  producers  who  have  anything  to  sell  shall 
bring  their  wares.  In  acordance  with  the  par- 
ticular kind  of  exchanges  which  it  is  expected 
will  take  place  in  it,  each  stall  or  portion  of  the 
market-place  is  called  a  vegetable  market,  a  fish 
market,  etc.,  as  the  case  may  be. 

The  market  brings  together  in  a  convenient 
manner  the  persons  of  a  single  locality  who 
have  products  to  sell.  Annual  markets,  or  fairs, 
serve*  the  same  purpose  for  larger  areas.  Many 
of  these  fairs  were  once  of  national  importance 
and  lasted  for  a  month  or  more,  though  the  usual 
period  was  from  one  to  two  weeks.  Such  a  fair 
still  survives  in  the  "  Messe  "  at  Leipzig,  Ger- 
many, and  a  much  more  extensive  one  in  Russia, 
at  Nijni-Novgorod.  Within  the  six  weeks  dur- 
ing which  this  great  fair  is  held  it  is  said  that  it 
is  frequented  by  300,000  persons,  and  that 
goods  are  exchanged  to  the  value  of  nearly 
1^40,000,000.1 

This  plan  of  markets  and  fairs  has  many 
advantages.  Otherwise  it  would  not  have  re- 
mained, as  it  has  in  many  countries  for  centu- 
ries, the  ordinary  method  of  making  the  great 

1  Gibbons,  The  History  of  Commerce  in  Europe,  p.  8i. 


THE  DISTRIBUTION  OF  PRODUCTS         203 

majority  of  the  most  common  exchanges.  The 
grouping  of  these  exchanges  at  a  particular  place, 
and  on  particular  days,  forms  a  favorable  condi- 
tion for  the  rise  of  a  special  class  of  intermediate 
traders,  who  perform  the  function  of  transferring 
products,  without  bringing  the  seller  and  pur- 
chaser into  actual  contact  at  all.  A  buyer  who 
has  either  studied  the  desires  of  consumers  for 
himself  so  that  he  feels  warranted  in  accumulat- 
ing a  stock,  or  is  in  relation  with  still  other 
buyers  who  are  in  such  a  position,  gives  in  ex- 
change either  other  goods,  or,  more  frequently, 
money  or  its  representative. 

In  one  sense  this  is  only  a  further  extension 
of  the  division  of  labor.  The  dealer  performs 
a  part  of  the  process  of  production,  if  he  adds 
to  the  utility  of  the  product  by  dividing  it  into 
smaller  portions  more  suitable  for  consumption, 
by  mixing  different  commodities,  as  the  druggist 
does,  to  make  them  available  for  consumers,  by 
storing  goods  until  consumers  desire  them,  or 
by  any  other  of  the  many  methods  of  increasing 
the  utility  of  products  just  before  they  pass  into 
the  hands  of  their  final  purchasers.  But  all  this 
might  be  done  and  often  is  done  by  the  original 


204  ECONOMICS 

producers.  The  trader  still  performs  a  unique 
function  for  society  by  his  aid  in  the  interchange 
of  products,  if  he  merely  assumes  the  risks  in- 
volved in  accumulating  a  stock  of  goods,  in  con- 
fidence that  there  are  purchasers  who  will  be 
attracted  where  the  stock  is  known  to  exist. 

The  word  "  market "  has  been  applied  in  an 
earlier  paragraph  to  the  special  place  where 
goods  of  a  particular  kind  are  exposed  for  sale. 
Even  where  such  markets  as  these  exist,  the 
word  market  is  also  used  in  a  wider  sense.  By 
the  market  for  fruit,  using  the  term  in  this  larger 
sense,  is  meant  not  merely  the  particular  place 
where  fruit  is  exposed  for  sale,  but  the  entire 
series  of  sales  and  purchases  within  a  given  area. 
It  is  said  that  there  is  a  good  market  for  fruit, 
when  there  is  a  considerable  supply  of  fruit, 
within  the  designated  area,  and  a  considerable 
number  of  persons  for  whom  fruit  has  a  high 
subjective  value.  A  local  market  is  a  limited 
area  within  "which  subjective  values  may  be  com- 
pared easily,  and  within  which  the  same  general 
conditions  of  production  prevail.  Wider  markets 
are  formed  when  by  improved  methods  of  trans- 
portation it  is  found  possible  to  transfer  goods 


THE  DISTRIBUTION   OF   PRODUCTS  205 

from  one  market  to  another,  thus  checking  the 
tendency  toward  lower  values  in  the  market 
which  is  well  supplied,  and  toward  higher  values 
in  the  market  in  which  they  are  scarce.  The 
two  local  areas  thus  become  one  market  when- 
ever the  same  conditions  of  value  prevail  in  both. 
The  characteristic  tendency  of  modern  com- 
merce is  the  breaking  down  of  the  barriers 
between  different  markets,  and  the  gradual 
development  of  the  world  market  for  all  ordi- 
nary commodities. 

To  nations  of  the  modern  world  with  their 
intricate  commercial  ramifications,  the  opening 
or  closing  of  a  market  for  their  surplus  goods  is 
an  event  of  vital  significance.  An  abundance  of 
particular  natural  products  will  not  insure  that 
markets  for  them  will  be  won  or  held,  unless 
there  is  also  an  enlightened  commercial  policy, 
and  the  commercial  policy  of  a  nation  is  closely 
connected  with  its  general  industrial  policy. 
The  manufacture  of  goods  becomes  an  aid  to 
commerce  when  it  is  specifically  directed  toward 
the  markets  of  the  world  rather  than  toward 
those  of  the  immediate  locality.  Many  nations, 
both  in  the  ancient  and  the  modern  world,  have 


206  ECONOMICS 

occupied  themselves  chiefly  in  the  making  of 
goods  which  are  intended  for  foreign  markets. 
In  some  cases  the  materials  from  which  they 
are  made  have  first  been  brought  from  other 
countries,  perhaps  from  the  very  countries  to 
which  the  finished  products  are  returned.  The 
Phoenicians,  many  centuries  before  the  Christian 
Era,  were  especially  skilful  in  the  preparation  of 
purple  and  scarlet  dyed  fabrics,  and  it  was  their 
custom  to  import  the  new  materials  for  these 
goods,  and  then  to  reexport  them  in  their  manu- 
factured forms.  They  sent  out  also  carpets, 
works  in  gold,  silver,  ivory,  amber,  and  glass,  in 
return  for  which  they  obtained  wool,  hides, 
metals,  and  food-stuffs.^  The  English,  at  the 
present  day,  import  raw  cotton,  manufacture  it 
into  cloth,  and  return  it  to  the  very  regions  in 
which  the  cotton  is  grown,  —  obtaining  in  return 
for  the  added  value,  cereals,  tobacco,  sugar,  addi- 
tional raw  materials  for  further  manufacture,  and 
such  other  products  as  they  may  desire. 

The   possibility   of   exchanges    of    this   kind 
arises,  either  from  the  superior  industrial  skill 
and  commercial  enterprise  of  the  nation  which 
1  Gibbons,  p.  8. 


THE  DISTRIBUTION  OF   PRODUCTS  207 

thus  shows  itself  to  be  independent  of  her  local 
environment,  or  from  the  fact  that  the  peoples 
with  whom  she  trades  find  a  more  profitable 
employment  for  their  energies  in  the  production 
of  raw  materials,  and  the  manufacture  of  special 
classes  of  goods  for  which  there  are  peculiarly 
favorable  conditions.  In  the  early  stages  of 
the  industrial  and  commercial  development,  a 
country  will  be  likely  to  find  that  it  is  more 
economical  to  rely  in  part  upon  exchanges  of 
this  kind,  permitting  other  and  more  advanced 
nations  to  utilize  their  acquired  skill  and  machin- 
ery in  manufacturing  its  finer  products.  But 
experience  has  shown  that  is  wise  for  a  nation 
to  develop  as  rapidly  as  possible  its  own  latent 
powers,  to  learn  the  processes  of  manufacture 
in  use  elsewhere,  and  to  invent  methods  of  util- 
izing directly  the  materials  furnished  by  their 
environment.  Schools  of  technology,  experi- 
mental stations,  and  commercial  high  schools, 
are  a  legitimate  part  of  the  educational  policy  of 
a  people  that  desires  to  put  itself  in  a  favorable 
commercial  position.  The  object  aimed  at  is 
not  a  sundering  of  commercial  relations  with 
other  nations,  but  rather  the  strengthening  of 


208  ECONOMICS 

those  relations,  by  offering  in  the  markets  of  the 
world  more  and  more  valuable  products.  The 
method  will  be  not  so  much  the  duplicating  of 
the  best  products  of  the  industry  of  other 
nations,  as  the  systematic  study  of  the  wants 
of  all  consumers,  including  ourselves,  recogniz- 
ing that  there  are  wants  not  adequately  sup- 
plied, or  capable  of  indefinite  expansion  if  the 
appropriate  commodities  can  be  supplied. 

This  suggests  wherein  lies  the  real  benefit  of 
commerce  to  a  nation,  as  made  up  of  importers 
and  consumers.  The  standard  of  living  includes 
all  those  commodities  that  have  a  marginal  util- 
ity above  the  margin  of  consumption,  and  that 
are  so  intimately  interrelated  that  the  absence 
of  any  one  would  induce  consumers  to  modify 
their  consumption,  or  to  increase  their  industry 
sufficiently  to  restore  it.  Commerce,  by  making 
it  possible  to  secure  new  commodities  on  more 
favorable  terms  than  is  permitted  by  the  local 
environment  alone,  adds  to  the  consumption  a 
greater  or  less  quantity  of  each  of  the  new  com- 
modities, in  accordance  with  their  marginal  util- 
ity. The  effect  is  immediately  noticeable  in 
the  improvement  of  the  standard  of  living,  not 


THE   DISTRIBUTION   OF   PRODUCTS         209 

only  increasing  the  number  of  commodities  that 
it  includes,  but,  what  is  more  important,  render- 
ing it  more  stable,  and  lessening  the  probability 
that  serious  deduction  will  be  permitted,  so  long 
as  greater  economy  in  use,  or  greater  energy  in 
production,  can  prevent  it. 

The  introduction  of  quick  transportation  has 
brought  immense  quantities  of  fruit  into  the 
markets  of  every  city  and  village.  The  use  of 
beet-root  for  the  manufacture  of  sugar  has 
added  a  staple  product  to  the  world  markets. 
Changes  in  the  methods  of  working  up  iron  ore 
into  iron  and  steel  have  practically  given  a  new 
material  for  the  construction  of  buildings,  and 
for  a  thousand  other  uses.  The  building  of  rail- 
ways, the  improvements  in  ocean  steamships, 
and  the  introduction  of  agricultural  machinery 
have  brought  about  a  fall  in  the  prices  of  agri- 
cultural products  so  great  as  to  amount  to  a 
revolution  ;  and  the  development  of  the  packing- 
house industry,  supplemented  by  the  rise  of  the 
frozen-meat  trade,  has  caused  a  corresponding 
decline  in  the  price  of  meat.  These  are  only 
typical  of  the  far-reaching  changes  of  the  past 
two  decades.     What  is  their  significance  in  the 


2IO  ECONOMICS 

general  interchange  of  products  among  the  in- 
habitants of  the  earth  ?  That  they  will  be 
followed  by  radical  changes  in  the  standard  of 
living  in  many  countries,  is  certain.  We  may 
expect  that  the  urgent  necessity  of  finding  new 
and  enlarged  markets  will  stimulate  commerce 
with  the  more  backward  races,  and  that  cheap- 
ened products  for  our  own  population  will  mod- 
ify our  industrial  and  social  life.  The  changes 
going  on  in  our  midst  in  the  grouping  of  popu- 
lation, in  the  development  of  new  and  more 
complex  desires,  in  the  increase  of  leisure  by 
the  shortening  of  the  hours  of  labor,  in  the  en- 
largement of  individual  capacity  by  better  train- 
ing of  muscle  and  mind,  are  dependent  upon  an 
effective  distribution  of  the  products  of  an  effec- 
tive industry. 


CHAPTER   XI 

MONEY 

The  evolution  of  industry  begins  within 
the  family  community.  Since  the  family  pro- 
vides for  all  its  own  necessities,  what  we 
know  as  exchanges  do  not  take  place.  Family 
discipline  compels  each  member  to  make  his 
due  contribution  to  the  general  stock,  and  the 
goods  are  distributed  as  the  needs  of  the 
several  members  require.  Marginal  utility 
shows  itself,  not  as  value,  but  as  the  regu- 
lator of  the  amount  of  energy  to  be  expended 
in  each  of  the  possible  directions.  The  second 
stage  in  the  evolution  of  industry  is  reached 
when  each  family  exchanges  with  others  in 
direct  barter.  Value  now  appears  occasion- 
ally as  power  in  exchange.  An  increase  in 
the  number  of  exchanges  finally  gives  rise  to 
the  market,  and  to  a  special  class  of  inter- 
mediate traders.  The  evolution  of  the  market 
creates    a    demand   for    a    standard    of    value. 

211 


212.  ECONOMICS 

Money  is  put  to  many  other  uses,  but  there- 
is  none  except  its  service  as  a  standard  of 
value  that  is  inseparable  from  the  idea  of 
money  and  that  could  not  be  filled  by  some- 
thing else  than  money. 

It  would  seem  that  the  only  real  requisite 
characteristics  of  money  are  permanence  of 
qualities  and  universality  of  demand,  within 
the  area  of  the  given  market.  Both  of  these 
characteristics  are  relative,  and  it  is  meant 
only  that  the  commodity  chosen  must  possess 
them  in  higher  degree  than  goods  in  general. 
If  the  widening  of  the  market  discovers  some 
other  commodity  more  generally  desired,  or 
of  more  permanent  value,  the  latter  will  tend 
to  displace  the  former  as  the  recognized  stand- 
ard of  value.  These  two  considerations  are 
sufficient  to  rule  out  as  money,  at  once,  many 
of  the  commodities  to  be  found  in  any  one 
community,  and  to  designate  the  one  or  two 
that  are  suitable.  In  a  region  well  supplied 
with  grass  and  peopled  by  herders  and  shep- 
herds, the  idea  of  permanence  is  naturally 
associated  with  cattle,  and  sheep.  They  are 
everywhere   recognized  as  a  source  of  wealth. 


MONEY  213 

Possession  of  a  large  herd  gives  distinction 
and  credit,  and  hence  a  position  of  power  in 
the  community.  A  man's  wealth  is  naturally 
measured  in  the  number  of  his  cattle,  and 
after  a  time  this  manner  of  speech  becomes 
so  well  established  that  it  is  applied  even  to 
persons  whose  wealth  really  exists  in  other 
forms.  At  any  given  time  a  man  is  said  to 
be  worth  so  many  cattle,  if  his  wealth  could  be 
exchanged  for  that  number,  even  though  at  the 
moment  he  does  not  own  a  single  animal. 

In  an  agricultural  colony,  like  those  of 
Virginia  and  Maryland,  tobacco  or  some  other 
agricultural  product  is  more  readily  associated 
with  the  idea  of  permanence' and  general  de- 
mand,—  partly,  however,  because  there  is  an 
unlimited  foreign  demand  for  that  product. 
If  it  were  desired  only  by  the  inhabitants  of 
the  colony,  the  fluctuations  in  value,  resulting 
from  the  difference  in  the  crops  of  different 
years,  would  be  so  great  as  to  render  it  unfit 
for  money.  Salt  is  a  suit-able  commodity  to 
serve  as  money  among  a  people  that  do  not 
have  direct  access  to  salt  mines  or  deposits, 
or    that    have    not    learned   to   produce   it   by 


214  ECONOMICS 

evaporation  of  salt  water;  but  as  soon  as 
they  are  brought  into  close  although  irregular 
contact  with  a  liberal  supply,  it  loses  its  money 
characteristic.  No  commodity  that  is  manu- 
factured especially  for  a  particular  market,  and 
•B  not  generally  desired  by  other  people  with 
whom  its  manufacturers  trade,  can  serve  as 
money,  though  it  may  serve  for  purposes  of 
barter  with  the  people  who  have  an  eager 
desire  for  it.  Opium,  rum,  blankets,  gaudy 
clothing,  firearms,  and  silver  have  frequently 
been  carried  to  semi-barbarous  peoples  in  ex- 
change for  ivory,  slaves,  or  other  forms  of 
wealth.  Sometimes  commercial  traders  have 
made  three-cornered  exchanges,  giving  up 
their  own  products  for  these  that  are  known 
to  be  especially  desired  by  the  people  who 
own  the  goods  that  they,  the  traders,  desire ; 
but  this  is  still  barter,  rather  than  sale  and 
purchase.  If  in  these  cases,  however,  the  ex- 
changes are  made  with  a  definite  reference  to 
some  standard  of  value,  which  has  the  char- 
acteristics mentioned,  permanence  and  univer- 
sal demand,  then  they  are  true  sales  and 
purchases,    and    the   commodity   thus    used    is 


MONEY  215 

true  money.  Iron  may  serve  as  money  among 
a  people  that  treasure  every  particle  of  it  that 
can  be  secured,  because  of  its  scarcity  and  its 
great  utility,  but  it  would  be  extremely  unfit 
in  countries  where  its  value  is  determined  by 
continually  fluctuating  conditions  of  use  and 
production. 

From  very  early  times,  in  the  countries 
which  have  engaged  in  commerce,  the  standard 
of  value  has  usually  been  one  or  the  other  of 
the  so-called  precious  metals,  silver  preceding 
gold,  as  copper  or  iron  had  probably  preceded 
silver.  But  the  use  of  neither  silver  nor  gold 
has  been  strictly  continuous  as  the  standard  of 
value  in  Europe  from  the  time  of  their  first  in- 
troduction in  the  early  days  of  commercial  in- 
tercourse. The  conditions  of  their  production 
have  varied  in  different  epochs,  and  their  value 
has  stood  in  different  relations  to  the  values  of 
commodities  in  general.  It  has  already  been 
noted  that  the  English  colonists  in  America 
were  at  first  without  any  metal  which  they  con- 
sidered suitable  for  a  standard  of  value.  During 
the  Middle  Ages  copper  was  extensively  used. 

In   various  countries  the    exigencies  of  war 


2l6  ECONOMICS 

have  sometimes  driven  the  rulers  to  the  use  of 
a  representative  money  of  which  the  basis  was 
not  silver  or  gold,  but  national  credit.  That  is 
to  say,  the  government  paid  out  for  supplies  of 
various  sorts  a  paper  currency  which  their 
owners  accepted  in  exchange,  in  the  belief  that 
commodities  of  equal  value  could  subsequently 
be  obtained  by  themselves  for  the  paper.  This 
kind  of  representative  money  is  based  solely 
upon  the  confidence  that  the  government  will 
subsequently  by  taxation  or  otherwise  obtain 
the  commodities  necessary  to  redeem  the  cur- 
rency when  presented.  Unfortunately  this  con- 
fidence has  not  always  been  justified,  and  in 
times  of  war,  when  the  national  credit  is  natu- 
rally low,  it  is  usually  difficult  to  induce  the 
people  to  accept  a  purely  representative  money. 
While  the  wars  of  the  French  Revolution  were 
in  progress,  a  money  was  issued  which  was 
based,  not  upon  national  credit,  but  upon  lands 
which  had  been  confiscated  by  the  government 
and  which  were  pledged  for  the  redemption  of 
the  currency.  This  plan  was  even  less  suc- 
cessful than  the  other. 

In  general,   we  may  say  that  the  money  of 


MONEY  217 

civilized  races  has  been  from  the  earliest  dawn 
of  history  either  silver  or  gold,  and  that  the 
latter  has  tended  to  displace  the  former  wher- 
ever there  has  been  steady  economic  progress 
and  industrial  advance.  The  reason  why  gold 
is  a  better  commodity  than  any  other  to  serve 
as  money  is  that  it  possesses  in  preeminent 
degree  the  qualities  which  we  have  indicated  as 
essential.  The  permanence  of  its  value,  guar- 
anteed by  the  universality  of  its  demand,  is 
greater  than  that  of  any  other  commodity  with 
which  we  are  familiar.  Moreover,  it  has  cer- 
tain physical  peculiarities  which  fit  it  to  serve 
as  an  actual  medium  of  exchange.  If  we  were 
content  to  use  representative  money  only  for 
actual  exchanges,  these  physical  properties 
would  have  less  bearing  upon  its  use  as  money, 
but  the  custom  of  using  the  same  commodity 
both  as  a  standard  of  value  and  as  a  medium  of 
exchange  becomes  established  before  there  is 
sufficient  enlightenment  or  public  confidence  to 
permit  the  general  use  of  a  representative  cur- 
rency ;  and  that  custom  is  only  gradually  dis- 
placed even  when  it  does  not  remain  in  full 
force. 


2l8  ECONOMICS 

The  special  qualities  possessed  in  an  unusual 
degree  by  gold,  are  shared  in  part  by  precious 
stones,  in  part  by  platinum,  in  a  still  higher  de- 
gree by  silver,  and  to  a  limited  extent  by 
bronze.  But  no  other  commodity  possesses 
them  all  in  such  happy  combination.  In  the 
first  place,  gold  is  easily  recognized  by  tests 
which  the  ordinary  man  may  apply.  From 
whatever  mines  it  may  come  its  quality  is  uni- 
form. In  the  melting-pot  the  gold  of  Australia 
and  of  California,  and  the  gold  mined  by  the 
Romans  in  the  time  of  Caesar,  are  found  to 
have  identical  qualities  and  to  be  indistinguish- 
able from  each  other,  but  easily  distinguishable 
from  all  other  metals.  Gold  then  is  everywhere 
the  same  commodity,  and  it  is  everywhere  ea- 
sily identified.  Secondly,  gold  possesses  great 
value  in  comparatively  small  bulk.  It  is  pos- 
sible to  carry  an  amount  which  represents  a 
great  quantity  of  ordinary  commodities,  or  as 
small  a  fraction  of  that  amount  as  may  be  de- 
sired. It  is  easily  divisible.  It  is  possible  to 
divide  any  given  portion  and  to  reunite  the 
parts  with  a  minimum  of  waste.  This  high 
value  in  proportion  to  bulk,  coupled  with  easy 


MONEY  219 

divisibility,  renders  gold  more  useful  as  a  me- 
dium than  either  the  diamond,  which  resembles 
it  in  the  first  particular  but  not  in  the  second, 
or  any  of  the  baser  metals,  which  have  the  sec- 
ond characteristic  but  not  the  first.  In  the 
next  place,  gold  has  extraordinary  durability. 
In  its  pure  state  it  is  worn  out  by  constant  use, 
but  when  slightly  hardened  by  the  mixture  of 
other  metals  it  wears  so  slowly  as  to  be  nearly 
imperishable.  Coins  still  exist  which  were  in 
active  circulation  over  two  thousand  years  ago. 
Finally,  gold  is  suited  by  its  malleability  for 
coinage,  though,  because  of  its  high  value,  only 
for  the  larger  units. 

When  gold  and  silver  were  first  used  as 
money  it  was  in  the  form  of  bars  or  ingots.  It 
was  necessary  in  each  transaction  to  weigh  the 
metal  and  to  test  its  fineness.  Later  they  were 
pressed  into  solids  of  regular  form,  each  con- 
taining specified  weight  and  of  specified  quality. 
It  was  now  possible  to  tell  the  value  of  a  given 
quantity  by  merely  counting  these  bars  or 
ingots ;  or  rather  this  would  have  been  suffi- 
cient if  the  stamp  or  other  indication  of  quality 
and  weight  could  have  been  relied  upon.     This 


220  ECONOMICS 

was  not  the  case  so  long  as  it  was  possible  to 
cut  or  file  away  a  part  of  the  block  without  ma- 
terially changing  its  appearance.  This  tempta- 
tion was  repeated  with  every  person  through 
whose  hands  the  ingots  passed,  and  it  would 
have  been  strange  if  some  dishonest  persons 
had  not  yielded  to  it  and  regularly  practised  the 
debasing  of  the  money  units. 

This  integrity  was  not  insured  until  the  sys- 
tem of  coinage  was  discovered  and  perfected. 
Coins  were  first  stamped  upon  one  side  only, 
evidently  not  a  sufficient  protection  ;  then  upon 
both  sides,  still  leaving  the  edge  exposed ; 
finally,  the  edges  were  milled  and  surmounted 
by  a  rim.  By  these  devices  the  monetary  unit 
was  fully  protected.  No  one  will  mutilate  a 
coin  if  by  doing  so  he  renders  it  impossible  for 
him  to  pass  it  in  current  exchange.  We  have 
now  become  so  familiar  with  the  exact  form  of 
a  perfect  coin  that  we  instinctively  refuse  to 
accept  any  which  has  been  filed  or  drilled  or 
unduly  worn. 

Coinage  is  undertaken  in  each  country  by  the 
government  and  is  forbidden  to  private  individ- 
uals.    The  reason  is  obvious.     The  entire  eco- 


MONEY  221 

nomic  activity  of  society  is  so  far  dependent  upon 
the  money  which  it  uses  that  it  is  absolutely 
essential  to  have  it  reliable  and  uniform.  The 
value  stamped  upon  the  monetary  unit  which 
is  to  serve  as  the  standard  of  value  should  in 
all  cases  correspond  to  its  real  value.  The 
quantity  and  quality  of  metal  which  it  is  said 
to  contain  should  really  be  found  in  case  it  is 
tested.  Governments  have  in  the  past  taken 
advantage  of  the  opportunity  to  debase  the 
coinage,  by  putting  less  than  the  nominal 
amount  of  the  valuable  metal  into  the  coin,  but 
both  national  honor  and  the  certainty  of  speedy 
detection  would  prevent  resort  to  such  means 
in  these  days,  and  the  business  is  safer  in  the 
hands  of  the  government  than   elsewhere. 

The  decimal  system  of.  monetary  units  now 
in  use  in  all  prominent  civilized  countries  except 
England  is  of  great  commercial  convenience. 
The  ease  with  which  our  own  monetary  system 
is  mastered  when  compared  with  the  effort 
required  to  learn  the  tables  of  weights  and 
measures  in  use,  suggests  the  gain  to  commerce 
and  industry  of  a  decimal  or  metrical  system  of 
weights  and  measures,  formed   upon  the  same 


222  ECONOMICS 

sensible  plan  that  has  been  adopted  in  France 
and  other  European  countries. 

Although  some  one  commodity,  and,  under 
modern  conditions,  practically  either  gold  or 
silver,  must  be  adopted  as  the  standard  of  value, 
it  does  not  follow  that  all  the  coins  in  current 
use  must  be  made  of  that  material.  Money  of 
account  has  sometimes  been  a  quite  different 
thing  from  any  coinage  in  actual  use,  and 
oftener  several  of  the  units  of  the  money  of 
account  were  not  represented  in  the  coinage, 
even  when  they  were  thought  of  in  terms  of  the 
same  commodity.  Thus  in  England,  during  the 
Norman  period,  the  only  coined  money  of  which 
we  are  certain  was  the  silver  penny,  while  the 
pound  and  the  shilling  were  used  as  money  of 
account.^  Foreign  gold  coins  were  in  circula- 
tion at  the  same  period.  At  the  present  time 
gold  is  the  standard  of  value  in  this  country, 
and  gold  coins  form  a  part  of  our  circulation, 
but  coins  are  also  made  of  silver,  nickel,  and 
bronze.  Wherein  do  these  coins  differ  from 
the  gold  coins  and  their  paper  representatives  ? 
There  would  be  no  essential  difference  if  the 

1  Gibbons,  p.  lOO. 


MONEY  223 

value  of  the  metal  in  the  different  coins  were  in 
exact  correspondence.  In  fact,  however,  ten 
silver  dollars,  twenty  half  dollars,  forty  quar- 
ters, two  hundred  five-cent  pieces,  and  one 
thousand  one-cent  pieces,  though  they  exchange 
readily  for  fifty  gold  dollars,  would  not  be  worth 
so  much  merely  as  bullion,  and  the  gold  in  an 
eagle  would  be  worth  more  than  the  metal  in 
any  one  of  the  above  mentioned  quantities  of 
money  that  constantly  pass  for  ten  dollars. 

This  is  explained  by  the  demand  for  money 
in  a  convenient  form  for  change.  Its  marginal 
utility  is  kept  high  by  limiting  the  amount 
coined.  If  coinage  were  unlimited,  it  would  be 
profitable  to  melt  and  coin  silver  bullion  until 
its  nominal  value  became  equal  to  its  bullion 
value.  Since  coinage  is  in  the  hands  of  the 
government,  this  can  be  prevented.  It  is  desir- 
able that  the  government  should  use  this  power 
to  give  increased  value  to  the  smaller  coins,  — 
to  the  subsidiary  coinage,  as  it  is  called, — only 
because  there  would  otherwise  be  a  constant 
danger  that  the  subsidiary  coins  would  by  the 
fluctuations  in  their  value  come  to  exceed  that 
of  the  standard  coins.     It  would  then  become 


224  ECONOMICS 

profitable  to  melt  down  the  silver,  nickel,  or 
bronze  coins  for  their  bullion,  which  would  be 
more  valuable  than  the  coins.  This  is  not 
illegal,  as  is  the  reverse  process,  and  it  is  to  pre- 
vent this  that  the  subsidiary  coinage  is  gener- 
ally slightly  overvalued  in  the  coinage.  It  is 
much  easier  to  prevent  dishonest  persons  from 
making  coins  without  authority,  i.e.y  counter- 
feiting, than  to  prevent  the  melting  down  or  the 
carrying  out  of  the  country  of  coins  that  had 
risen  in  value  above  that  of  the  standard  money. 
At  the  same  time  the  difference  between  the 
value  of  the  standard  and  other  coins  should 
not  be  very  great.  Although  the  government 
makes  a  clear  profit  of  forty  cents  whenever  it 
coins  sixty  cents'  worth  of  nickel  or  silver  into 
pieces  which  are  stamped  one  dollar,  and  are 
accepted  for  that  amount,  yet  this  is  only  indi- 
rect taxation  and  not  its  best  form.  Under 
this  method  all  the  subsidiary  coins  become 
really  representative  money  to  the  full  extent 
of  the  difference  between  the  bullion  and  their 
exchange  value.  If  it  is  ever  desired  to  make 
them  anything  else  than  representative  money, 
it  will  be  necessary  to  call  them  in  for  redemp- 


MONEY  225 

tion  at  the  full  value  at  which  they  were  issued, 
thus  sacrificing  the  advantage  gained  by  their 
original  coinage. 

This  is  at  present  the  actual  position  of  our 
own  silver  coinage.  The  government  has  realized 
a  profit  of  several  million  dollars,  but  the  value 
of  the  bullion  in  each  silver  dollar  is  so  low  that 
it  can  be  regarded  only  as  a  representative  dol- 
lar and  not  as  real  money.  The  only  difference 
between  our  silver  currency  and  any  paper  rep- 
resentative money  that  the  government  might 
issue  is  that  the  silver  currency  is  made  from  a 
more  expensive  material.  Its  value  is  main- 
tained in  precisely  the  same  manner  as  that  of 
any  other  representative  money,  viz.,  by  the 
general  confidence  that  the  government  will  in- 
sure a  continuance  of  its  equivalence  with  real 
money. 

No  commodity  has  been  suggested  that  com- 
bines the  essential  qualities  of  a  standard  of 
value  with  the  physical  properties  requisite  for 
a  medium  of  exchange  in  small  transactions. 
It  will  probably  remain  necessary,  therefore,  to 
canstitute  the  coinage  as  at  present  from  metals 
of  different  values,  in  quantities  corresponding 
Q 


226  ECONOMICS 

to  the  relative  numbers  of  large  and  small  ex- 
changes. To  prevent  the  export  or  melting 
down  of  its  small  change,  it  will  be  necessary  to 
make  it  to  some  extent  representative  in  charac- 
ter by  making  it  slightly  more  valuable  as  coin 
than  as  bullion,  but  any  very  wide  discrepancy 
between  the  value  of  the  standard  money  and 
other  money  in  the  form  of  coin  is  to  be  avoided, 
as  rendering  the  currency  unstable.  If  the  sub- 
sidiary coin  is  issued  in  excess,  it  is  liable  to  fall 
in  value  to  the  extent  that  it  has  been  over- 
valued, thus  causing  wide-spread  disturbance. 
In  the  absence  of  a  special  law  requiring  the 
acceptance  of  the  less  valuable  money  in  pay- 
ment of  previously  incurred  debts,  no  one  will 
be  found  willing  to  accept  it  at  its  face  value  as 
legal  tender.  If  there  is  a  law  requiring  the 
use  of  the  cheaper  money,  the  values  of  other 
commodities  will  become  adjusted  to  the  lower 
standard  and  the  better  money  will  disappear 
from  circulation. 

The  enactment  of  a  legal  tender  law  specify- 
ing which  kinds  of  money  may  be  lawfully  used 
in  the  discharge  of  debts  introduces  a  new  factor 
of  great  importance  into  the  national  monetary 


MONEY  227 

system.  We  have  seen  that  it  is  natural  for 
good  money  to  displace  that  which  is  imperfect 
or  not  adapted  to  the  present  condition  of  com- 
merce. Whenever  a  commodity  once  used  as 
money  has  become  unfit  for  such  use  by  the 
fact  that  changed  conditions  in  production  cause 
greater  fluctuations  in  its  value,  or  by  any  other 
cause,  there  is  always  at  hand  some  other  com- 
modity to  take  its  place.  The  law  of  natural 
selection  thus  insures  the  use  of  the  money  best 
suited  to  the  particular  commercial  and  indus- 
trial conditions. 

These  principles  are  greatly  modified  by  the 
adoption  of  a  ''legal  tender."  Let  us  first  sup- 
pose that  only  one  kind  of  money  is  designated 
by  the  law  as  satisfactory  payment  of  debts,  but 
that  there  are  in  circulation  both  new  coins  of 
full  weight,  and  others  that  are  much  worn  or 
otherwise  reduced  in  value.  The  law  does  not 
discriminate,  but  permits  any  properly  stamped 
coin  to  be  used  in  the  payment  of  debts.  This 
evidently  applies  only  to  debts  due  within  the 
country.  For  the  payment  of  debts  incurred  in 
international  exchanges  the  coins  are  not  counted 
but  weighed.     In  other  words,  the  coins  pass 


228  ECONOMICS 

for  their  bullion,  not  for  their  face  value.  If  a 
merchant  has  payments  to  make  both  at  home 
and  abroad,  he  will  naturally  use  the  best  coins 
for  export,  and  the  poorer  ones  for  home  pay- 
ment, because  the  coins  exported  are  to  be 
weighed,  while  those  to  be  paid  at  home  are 
only  counted.  When  the  conditions  call  for  the 
export  of  coin,  a  nation  will  lose  that  part  of  its 
currency  which  is  of  full  weight  if  there  is  any 
considerable  part  of  it  that  has  become  light. 

The  same  tendency  is  shown  on  a  larger  scale 
if  there  are  two  kinds  of  money,  declared  by  law 
to  be  equally  legal  tender  for  the  payment  of 
debts.  Here  there  is  wider  room  for  the  dis- 
crepancy in  real  value,  since  fluctuations  in 
the  conditions  of  production  or  in  the  general 
demand  for  either  commodity  will  cause  it  to 
have  a  different  marginal  utility,  and  hence  a 
different  value  from  that  of  the  other.  The 
better  money  will  then  be  driven  out  of  circula- 
tion by  the  cheaper,  since  either  can  be  used  in- 
differently at  home,  while,  in  any  international 
transactions,  the  more  valuable  coin  will  pur- 
chase more  commodities  and  will  therefore  be 
preferred.     The  difference  in  value  may  not  be- 


MONEY  229 

come  apparent  so  long  as  there  is  no  more  money 
in  circulation  than  the  local  conditions  require. 
By  limiting  the  total  amount  of  the  circulation, 
the  baser  coin  may  be  given  a  higher  exchange 
value  than  it  would  have  as  bullion,  since  as  we 
have  already  seen  it  would  act  as  representative 
money.  The  law  that  bad  money  drives  out 
good  money  under  the  conditions  specified,  — 
an  excess  of  currency  and  an  established  legal 
tender, —  is  ordinarily  known  as  "  Gresham's 
law,"  from  the  writer  who  first  formulated  it, 
Sir  Thomas  Gresham,  an  Englishman,  who  lived 
in  the  sixteenth  century. 

We  have  just  used  the  expression  **an  excess 
of  currency."  It  is  important  that  we  should 
understand  in  what  sense  the  currency  of  a  na- 
tion may  be  in  excess  of  its  needs,  and  how  this 
condition  is  remedied.  The  money  value  of  any 
commodity  is  generally  spoken  of  as  its  price. 
When  the  price  of  a  commodity  varies  we  com- 
monly suppose  that  the  value  of  the  commodity 
has  varied.  This  is  not  necessarily  the  case. 
Price  is  a  ratio,  and  the  variation  may  have  taken 
place  in  its  other  term,  viz.,  money.  If  a  very 
large  number  of  commodities  have  fallen  or  risen 


230  ECONOMICS 

in  price,  and  this  movement  is  not  balanced  by 
opposite  movements  in  the  prices  of  other  com- 
modities, we  feel  reasonably  sure  that  it  is 
money  itself  and  not  the  commodities  that  have 
changed  in  value.  If  we  could  suddenly  increase 
the  volume  of  money  in  any  isolated  community, 
leaving  the  relations  of  all  other  commodities  to 
each  other  unchanged,  the  effect  would  be  a  rise 
in  the  prices  of  all  commodities  to  correspond 
with  the  increase  of  volume.  A  day's  labor 
would  exchange  for  a  large  sum  of  money,  but 
the  laborer  would  be  compelled  to  pay  propor- 
tionately higher  prices  for  the  goods  which  he 
purchased. 

If  a  community  had  no  business  relations 
with  other  communities,  it  would  be  a  matter  of 
comparative  indifference  whether  prices  were 
high  or  low.  Their  level  would  be  determined 
exactly  by  the  quantity  of  money  in  circulation 
at  any  given  moment,  a  large  quantity  giving 
high  prices  and  a  small  quantity  correspondingly 
low  prices ;  or,  stated  inversely,  high  prices 
would  indicate  a  liberal  supply  of  money  and 
low  prices  a  smaller  supply.  All  values  except 
that  of  money  would  remain  constant,  while  the 


MONEY  231 

value  of  money  would  be  great  where  prices 
are  low  and  less  where  high  prices  prevail. 
Neither  the  high  nor  the  low  level  would  afford 
any  indication  of  the  prosperity  of  the  commu- 
nity, or  of  the  total  quantity  of  wealth  in  exist- 
ence. The  sole  difference  would  be  that  in  the 
period  of  high  prices  a  given  quantity  of  money 
would  exchange  for  a  smaller  quantity  of  any 
other  commodity,  and  that  a  given  quantity  of 
any  commodity  would  command  a  higher  price, 
than  in  a  period  of  low  prices.  In  the  above 
statement  of  the  relation  between  prices  and  the 
quantity  of  money  in  circulation,  we  have  as- 
sumed that  the  community  is  isolated,  i.e.,  with- 
out any  relations  with  other  communities  that 
would  permit  prices  to  be  compared  or  money 
to  be  carried  from  one  to  the  other.  In  fact, 
no  community  is  in  such  a  position,  and  the  law 
of  the  international  distribution  of  money  acts 
through  the  medium  of  the  price  level  of  differ- 
ent countries. 

By  a  method  which  seems  automatic,  and 
really  is  so,  although  it  is  only  a  phase  of  the 
general  law  of  the  distribution  of  products, 
money  flows  from  the  places  where  it  is  abun- 


232  ECONOMICS 

dant  to  those  where  it  is  relatively  scarce. 
Abundance,  as  we  have  seen,  is  indicated  by 
the  high  prices  of  commodities,  while  scarcity 
reveals  itself  in  prevailing  low  prices.  As  soon 
as  the  difference  is  sufficient  to  cover  the  cost 
of  transporting  goods  that  have  been  for  sale 
in  the  region  of  low  prices,  those  who  have 
them  for  sale  will  naturally  send  them  to  the 
places  where  better  prices  are  to  be  had  for 
them.  The  region  of  high  prices  offers  a  better 
market  for  goode  and  it  will  be  sure  to  attract 
them.  But  it  is  a  poor  place  to  buy,  since  the 
prevalence  of  high  prices  will  prevent  a  pur- 
chaser from  securing  as  much  for  his  money 
as  in  the  place  where  prices  are  lower.  Both 
causes  operate  to  insure  a  flow  of  money  to 
the  region  in  which  it  is  scarce  until  a  uni- 
formity of  prices  has  been  secured.  An 
increase  of  money,  in  a  community  with 
commercial  relations,  beyond  that  amount 
which  the  law  of  international  prices  allows, 
would  be  a  disadvantage  if  it  did  not  thus 
bring  its  own  remedy. 

In   our   original    statement    of    the   relation 
between   prices  and   the  quantity  of  money  in 


MONEY  233 

circulation,  we  assumed  further  that  the  change 
in  the  volume  of  money  was  made  suddenly  or 
in  such  manner  as  to  affect  similarly  at  the 
same  instant  the  prices  of  all  commodities.  It 
is  evident  that  by  any  of  the  ordinary  methods 
in  which  the  quantity  of  money  is  increased  or 
diminished  the  effect  is  not  thus  generally  ex- 
perienced at  the  same  moment.  Some  com- 
modities change  in  price  more  quickly  than 
others.  Some  persons  have  fixed  incomes  call- 
ing for  definite  amounts  of  money  each  year 
or  month,  regardless  of  the  purchasing  power 
of  the  money  that  they  receive,  and  there  is 
friction  of  many  kinds  that  prevents  a  uni- 
versal rise  or  fall  of  prices  to  correspond  exactly 
with  the  increase  or  decrease  of  the  currency. 
The  result  of  any  change  in  the  volume  of 
the  currency  is,  therefore,  to  change  the  value 
relations  of  commodities,  giving  some,  for  a 
time  at  least,  relatively  lower  values  than 
others.  Such  changes  have  therefore  mo- 
mentous social  consequences. 

One  additional  consideration  of  great  im- 
portance remains  to  be  noticed.  Prices  do 
not   result    from  a   simple   comparison  of  the 


234  ECONOMICS 

quantity  of  commodities  with  the  quantity  of 
money.  Money  is  the  standard  of  value  and 
performs  its  function  by  acting  as  a  medium 
of  exchange.  It  becomes  the  standard  in  virtue 
of  its  constant  use  as  such  medium.  It  is, 
therefore,  not  the  total  stock  of  commodities, 
but  the  number  of  exchanges  taken  in  con- 
nection with  the  value  of  the  commodities  to 
be  exchanged,  that  constitutes  the  demand  for 
money.  By  the  total  volume  of  business  is 
meant  the  value  of  the  commodities  exchanged 
in  a  given  time,  multiplied  by  the  number  of 
exchanges  that  are  made.  If  the  total  volume 
of  business  remains  constant,  the  amount  of 
money  required  is  also  constant.  If  the  volume 
of  business  increases  or  diminishes,  the  volume 
of  money  must  increase  or  diminish  in  propor- 
tion, else  there  will  be  a  rise  or  fall  in  prices 
similar  to  that  which  would  accompany  a  dimi-. 
nution  or  increase  of  money  with  business 
stable.  The  law  of  the  international  distri- 
bution of  money  does  not,  therefore,  insure 
to  each  country  an  unchanged  quantity  of 
money,  but  that  the  supply  of  money  will 
preserve  a  constant  relation  to  the  amount  of 


MONEY  235 

work  which  there  is  for  money  to  do,  that  it 
shall  bear  always  the  same  relation  to  the 
number  of  exchanges  taken  in  connection  with 
the  value  of  the  commodities  exchanged. 

The  shipping  of  money,  from  one  country 
to  another,  is  usually  associated  with  the  ad- 
justment of  what  is  known  as  the  balance  of 
trade  between  the  two  countries.  The  bulk 
of  the  exchanges  between  any  two  countries 
that  form  parts  of  the  modern  commercial 
world,  is  settled,  not  by  purchase  and  sale  for 
money,  but  by  the  transfer  of  bills  of  exchange. 
Suppose  that  a  merchant  in  Liverpool,  having 
purchased  a  cargo  of  cotton  from  Savannah, 
knows  of  a  wholesale  dealer  in  his  own  city 
who  has  sold  a  quantity  of  manufactured  cloth 
of  equal  value  to  an  importer  in  New  York. 
It  would  involve  useless  expense  for  him  to 
send  his  money  to  America  while  at  the  same 
time  an  equal  amount  of  money  is  on  its  way 
from  America  to  England  to  pay  for  the  goods 
purchased  in  New  York,  if  some  way  could  be 
found  for  the  two  accounts  to  be  set  off  against 
each  other.  The  New  York  importer  can  be 
directed    to  pay  the  cotton-grower   in  Georgia 


236  ECONOMICS 

on  condition  that  the  Liverpool  dealer  in  cotton 
will  pay  the  cloth-manufacturer.  If  the  Ameri- 
can ends  of  both  transactions  are,  like  the  other, 
in  the  same  city  the  economy  of  this  method  of 
squaring  accounts  is  still  greater.  It  is  prob- 
able that,  in  any  event,  there  are  transactions 
between  Savannah  and  New  York  City  that 
will  obviate  the  necessity  of  sending  the  coin, 
and  that  the  two  accounts  can  be  adjusted 
by  a  transfer  of  domestic  bills  of  exchange  or 
drafts. 

The  same  principle  that  we  found  operating 
in  the  market  to  prevent  the  necessity  of  every 
seller  finding  his  own  buyer,  again  comes  into 
operation.  Special  dealers  in  bills  of  exchange 
take  the  risks  of  purchasing  from  exporters  the 
bills  which  will  be  useful  in  paying  for  goods 
that  are  to  be  imported  into  the  same  market. 
These  bills  are  at  a  premium  when  goods  are 
coming  in  faster  than  they  are  exported,  since 
that  means  that  gold  must  be  shipped  to  cover 
the  difference.  The  shipping  of  gold  is  more 
expensive  than  the  mailing  of  a  bill  of  exchange, 
and  a  slight  advance  on  the  amount  of  the  trans- 
action must  be  charged  to  cover  this  expense. 


MONEY  237 

This  state  of  commerce  in  which  the  value  of 
the  imports  exceeds  that  of  the  exports,  so  that 
money  must  be  sent  out  of  the  country  to  cover 
the  difference,  is  described  as  an  unfavorable 
balance  of  trade.  If  the  exports  exceed  the  im- 
ports, so  that  foreign  exchange  is  at  a  discount 
and  gold  is  flowing  into  the  country,  the  balance 
of  trade  is  said  to  be  favorable.  These  expres- 
sions are,  however,  misleading.  Neither  condi- 
tion is  necessarily  favorable  or  unfavorable  to 
national  welfare.  If  a  country  were  in  position 
to  continue  indefinitely  paying  out  money  for 
goods,  it  would  be  an  indication  that  it  was 
wealthy,  in  the  possession  of  mines  of  gold, 
and  that  the  marginal  utility  of  the  gold  was 
lower  than  that  of  the  goods  imported.  The 
exchange  of  her  gold  for  other  commodities 
would  be  a  clear  gain,  as  is  the  exchange  of  sur- 
plus wheat  for  any  commodity  that  is  more 
desired. 

Unless  the  cause  be  the  possession  of  mines 
sufficiently  rich  to  make  gold  one  of  the  regular 
and  profitable  exports,  the  balance  of  trade  can- 
not remain  permanently  unfavorable,  for  the 
reason  already  explained.    The  scarcity  of  money 


238  ECONOMICS 

resulting  from  the  export  of  gold  causes  prices 
to  sink  to  a  lower  level  than  that  of  other  coun- 
tries. This  will  immediately  check  the  importa- 
tion of  goods  which  have  been  coming,  and  will 
induce  a  return  of  money  from  buyers  who  wish 
to  take  advantage  of  the  reduction  in  prices.  If 
the  reduction  has  been  slight,  either  one  of  the 
two  forces  may  alone  restore  the  equilibrium. 
The  shifting  of  the  balance  of  trade  causes 
money  to  flow  now  here,  now  there,  in  response 
to  the  most  delicate  changes  in  the  market. 
With  ocean  greyhounds  to  carry  any  amount 
of  money  from  Europe  to  America,  or  vice 
versa,  within  a  week's  time,  and  with  the  ma- 
rine cable  to  communicate  every  fluctuation  of 
the  rates  of  exchange,  the  prices  of  commodi- 
ties tend  to  approach  the  same  level  through- 
out the  civilized  world. 


CHAPTER   XII 

THE    ORGANIZATION    OF    CREDIT 

Every  economic  relation  between  two  mem- 
bers of  society  implies  credit,  or  confidence  that 
the  service  or  commodity  given  by  one  to  the 
other  will  be  repaid  immediately,  or  at  some  fut- 
ure time,  as  may  be  agreed.  Credit  has  already 
been  enumerated  as  one  of  the  most  prominent 
features  of  the  social  environment  of  man.  It 
has  been  seen  that  barter,  purchase  on  condition 
of  deferred  payment,  the  use  of  representative 
money,  and  the  interchange  of  products  between 
distant  places,  are  all  in  different  degrees  de- 
pendent upon  some  kind  and  degree  of  credit. 
We  are  now  to  examine  from  a  different  stand- 
point the  place  of  credit  in  the  economic  organ- 
ization of  society. 

Banks  exist  for  the  special  purpose  of 
organizing  credit  in  such  a  way  as  to  make  it 
of  use  in  commerce  and  industry.  The  nature 
239 


240  ECONOMICS 

of  credit  will  best  be  explained  by  a  reference 
to  the  various  steps  by  which  the  institution 
of  banking  has  developed.  In  their  simplest 
form  banks  were  merely  associations  of  mer- 
chants whose  money  was  deposited  permanently 
in  a  common  treasury.  In  the  earliest  histori- 
cal example,  the  Bank  of  Venice,  the  deposit 
was  the  state  treasury,  and  the  money  once  de- 
posited was  never  returned.  But  the  principle 
will  be  made  clearer  if  we  suppose  the  money 
to  have  been  placed  in  a  vault  under  the  care  of 
a  custodian  chosen  for  the  purpose  by  the  mem- 
bers of  the  banking  association.  Each  member 
is  credited  with  the  amount  of  his  purchase. 
Whenever  he  desires  to  make  a  purchase  with 
any  part  of  the  money  which  he  has  deposited, 
he  does  not  withdraw  it,  but  simply  directs  that 
the  ownership  shall  be  transferred  on  the  books 
of  the  bank  to  the  person  from  whom  he  has 
made  the  purchase.  If  this  second  person  is  a 
member  of  the  banking  company,  the  money  in 
the  treasury  is  not  disturbed,  but  the  account  of 
the  one  member  shows  a  larger  and  of  the  other 
a  smaller  credit  than  before  the  transaction  took 
place.     Every  transfer  of  goods  among  the  mem- 


THE  ORGANIZATION  OF  CREDIT  24 1 

bers  of  the  association  is  thus  represented  by  a 
transfer  of  a  corresponding  amount  in  the  credit 
at  the  bank,  which  takes  the  place  of  a  transfer 
of  money. 

The  word  "  credit "  has  here  a  slightly  differ- 
ent meaning  from  that  which  we  have  assigned 
to  it  in  preceding  chapters.  Heretofore  we  have 
used  it  as  a  synonyme  for  confidence  or  trust. 
In  the  present  sense  it  indicates  power  over 
commodities  secured  in  this  instance  by  full 
payment  of  money  in  advance.  It  is  only  in 
this  latter  sense  that  we  can  speak  of  the 
organization  of  credit.  The  word  would  hardly 
have  been  used  in  this  sense  except  for  the 
practice  of  extending  this  power  over  com- 
modities on  trust  to  persons  who  had  not 
actually  advanced  payment  for  them. 

The  bank,  in  the  simple  case  described,  ob- 
tains money  from  each  of  its  members  giving 
in  return  credit,  or  the  power  of  drawing 
upon  it  for  the  amount  of  the  deposit.  Be- 
fore such  an  arrangement  as  this  can  be  made 
the  bank  itself  must  have  gained  credit ;  or, 
to  put  it  in  another  way,  the  members  of  the 
proposed  company  must  have  gained  sufficient 


242  ECONOMICS 

mutual  confidence  to  justify  their  intrusting 
their  money  to  the  common  treasury. 

The  advantages  of  this  most  primitive  kind 
of  banking  are,  first,  that  it  reduces  the  wear 
of  coin.  Money  will  last  longer  properly 
stored  in  a  safe  vault  than  in  actual  circula- 
tion. Secondly,  it  makes  easier  the  adoption 
and  maintenance  of  the  best  kind  of  money. 
If  the  currency  consists  of  many  kinds  of 
coinage,  some  of  full  weight  and  others  worn 
or  debased,  the  bank  will  perform  a  useful 
service  for  its  members  by  reducing  the  value 
of  the  different  deposits  to  the  common  stand- 
ard, obviating  the  necessity  for  future  tests 
at  each  exchange.  This  useful  function  was 
for  a  long  time  denied  to  banking  institutions 
in  England  by  the  crown,  which  kept  this 
profitable  business  in  its  own  hands.  Thirdly, 
if  the  members  of  the  banking  association 
live  in  different  cities,  considerable  expense 
and  difficulty  in  transporting  coin  is  saved. 

From  this  system  of  banking,  of  which  the 
advantages  are  confined  chiefly  to  those  who 
have  entered  into  a  special  business  relation, 
there  naturally  springs  a  more  general  use  of 


THE  ORGANIZATION   OF  CREDIT  243 

the  forms  of  credit  to  which  the  system  has 
given  rise.  The  written  orders  or  bills  drawn 
against  the  bank,  when  duly  certified,  are  ac- 
cepted as  representative  credit.  They  supple- 
ment the  money  in  circulation  in  the  manner 
described  in  the  chapter  on  the  distribution 
of  products.  Banks  find  that  their  own  credit 
enables  them  to  meet  all  demands  upon  them 
from  their  depositors  without  actually  retain- 
ing in  their  vaults  all  the  monies  deposited. 
Such  amounts  as  are  not  needed  may  be  lent 
out  at  a  profit.  Among  the  most  frequent 
loans  in  the  early  days  of  banking  were  those 
to  the  government.  Sometimes  the  king 
would  have  urgent  need  for  money,  for  which 
taxes  had  been  voted,  but  which  had  not  yet 
been  collected.  Those  who  possessed  hoards 
of  money  were  in  position  to  advance  it  on 
a  pledge  that  it  would  be  repaid  with  interest 
at  a  specified  time.  In  some  instances  the 
original  loan  was  never  repaid,  the  bankers 
receiving  instead  an  annual  interest.  The 
famous  Bank  of  England  was  founded  to  re- 
lieve the  necessities  of  the  government.  The 
bank   consisted   of    subscribers   who   had    lent 


244  ECONOMICS 

i,200,000;£  to  the  government  on  the  security 
that  out  of  the  payments  of  tonnage^  they 
should  annually  receive  eight  per  cent,  or,  in 
all,  100,000;^.^  The  bank  thus  organized  was 
also  to  have  the  privilege  of  carrying  on  an 
ordinary  banking  business,  i.e.y  to  receive  money 
on  deposit  and  to  lend  it  at  interest.  Until 
this  time  in  England  the  banking  business 
had  been  chiefly  in  the  hands  of  the  gold- 
smiths. It  was  the  practice  for  merchants  to 
keep  their  available  funds  in  the  chests  of 
the  goldsmith,  drawing  it  out  when  neces- 
sary, but  usually  by  means  of  orders  or  bills 
which  were  used  in  the  payment  of  debts 
and  which  generally  passed  through  many 
hands,  just  as  modern  bank-notes  do,  before 
they  were  presented  for  payment. 

Experience  showed  that  fully  one-half  —  or, 
in  favorable  circumstances,  even  two-thirds  — 
of  the  funds  thus  collected  in  a  large  and  stable 
bank  might  safely  be  used  in  outside  loans. 
If  one-third  or  one-half   of  the  deposits  were 

1  A  tax  on  ships. 

2  Cunningham,  Growth  of  English  History  and  Commerce^ 
n.,  395- 


THE   ORGANIZATION   OF  CREDIT  245 

kept  on  hand  in  the  form  of  ready  cash,  it 
would  be  sufficient  to  meet  all  ordinary  de- 
mands. The  reason  for  this  is  that  a  depositor 
seldom  draws  on  the  bank  immediately  for  the 
full  amount  of  his  deposit,  and  since  there  are 
every  day  new  deposits  there  will  always  be 
some  money  not  in  danger  of  withdrawal ; 
secondly,  one  who  receives  an  order  for  money 
will  not  take  the  trouble  to  present  it  if  he  can 
satisfy  his  own  obligations,  or  make  new  pur- 
chases with  the  order  just  as  well  as  with  the 
cash  that  he  would  obtain  by  presenting  it. 
Only  careful  experiment  and  wise  judgment 
will  enable  the  bankers  to  estimate  correctly 
the  extent  to  which  they  may  rely  upon  these 
two  facts  in  the  management  of  their  business. 
Depositors  are  easily  alarmed,  and  if  there  is  a 
rumor  that  the  bank  is  in  the  least  danger  of 
failing  to  meet  their  demands  upon  it,  there 
is  certain  to  be  a  rush  of  withdrawals  far  in 
excess  of  the  ordinary  demand.  Such  emer- 
gencies severely  test  the  ability  of  the  bank  to 
render  available  its  outstanding  loans  and  in- 
vestments. In  times  of  crisis,  banks  have 
frequently  failed,  notwithstanding  an  abundance 


246  ECONOMICS 

of  assets,  merely  because  they  are  not  in  a  form 
available  for  immediate  use  and  could  not  be 
exchanged  for  ready  cash  except  at  a  great 
sacrifice,  if  at  all. 

The  proper  basis  for  representative  credit  is 
not  therefore  wealth,  in  general,  but  those 
forms  of  wealth  that  can  be  readily  realized 
upon  when  the  necessity  arises.^  For  a  sound 
basis  it  is  further  essential  that  the  available 
funds  should  be  accurately  proportioned  to 
the  existing  stage  of  commercial  development. 
Where  people  are  accustomed  to  the  banking 
system,  and  where  banks  are  in  the  habit  of 
coming  together  for  mutual  assistance  in  periods 
of  danger  and  public  distrust,  the  whole  field  of 
credit  is  vastly  extended  without  corresponding 
increase  of  the  reserve  funds  in  the  vaults  of 
the  banks.  Where  people  are  accustomed  to 
barter,  or  to  use  coins  in  all  purchase  and  sale, 
the  field  of  credit  is  closely  circumscribed. 

The  most  primitive  and  widely  diffused  form 
of  credit,  antedating  the  rise  of  banks,  is  that 
of    book   accounts.      The    merchant    grants    a 

1  There,  in  part,  lay  the  difficulty  with  the  assignats  of  the 
French  Revolution. 


THE   ORGANIZATION   OF  CREDIT  24/ 

period  of  time  to  his  customer  for  the  payment 
of  goods  bought,  himself  receiving  in  turn 
similar  grace  from  the  wholesale  dealer.  This 
system  springs  from  the  greater  convenience 
to  buyers  from  the  permission  to  postpone  pay- 
ment for  irregular  purchases  until  a  future  date, 
usually  fixed  with  some  reference  to  the  ordinary 
time  for  customers  to  receive  their  own  income  ; 
and  upon  the  well-known  trait  of  human  nature, 
that  goods  will  be  purchased  more  freely  if  there 
is  no  demand  for  immediate  payment. 

The  system  causes  a  great  saving  in  the  use 
of  small  change,  and  it  secures  a  somewhat  more 
intimate  relation  between  merchant  and  cus- 
tomer. Where  pass-books  or  some  other  per- 
manent memorandum  of  sales  is  kept  in  the 
hands  of  the  customer,  it  affords  an  opportu- 
nity for  a  survey  of  the  general  expenditure 
which  may  result  in  judicious  readjustment. 
But  the  system  is  subject  to  grave  abuses.  Mer- 
chants have  difficulty  in  determining  whether 
their  various  customers  should  be  given  credit, 
and,  if  so,  to  what  extent.  Dishonest  debtors 
and  others  whose  ventures  prove  unfortunate, 
so  that  they  are  unable  to  pay  their  accounts  at 


248  ECONOMICS 

the  time  stipulated,  bring  heavy  losses.  As  an 
insurance  against  such  losses,  merchants  are 
obliged  to  charge  higher  prices  for  their  goods. 
Their  irregularity  in  collecting  such  debts  makes 
it  difficult  for  merchants  to  meet  their  own  obli- 
gations. Even  when  there  are  no  errors  of 
judgment  from  the  merchant's  standpoint,  in 
the  giving  of  credit  much  harm  is  often  done  by 
the  practice.  Customers  gradually  find  them- 
selves limited  to  the  particular  stores  at  which 
their  credit  is  good,  and  so  lose  the  advan- 
tage from  an  inspection  of  the  entire  market. 
Higher  prices  are  paid  because  of  the  risks  and 
expenses  of  collection.  Unexpectedly  large 
accounts  face  the  customer  when  the  time  for 
their  presentation  appears,  and  if  they  are  paid 
promptly,  the  result  is  often  an  unbalanced  and 
irregular  distribution  of  income.  The  experi- 
ence of  codperative  stores  indicates  that  a  sav- 
ing of  from  ten  per  cent  upwards  is  possible  by 
the  introduction  of  a  strictly  cash  system  accom- 
panied by  economies  of  retail  trade  which  it 
permits.  This  form  of  credit,  though  it  has 
assumed  vast  proportions,  is  therefore  of  doubt- 
ful utility. 


THE  ORGANIZATION  OF  CREDIT  249 

The  next  form  of  credit,  in  point  of  general 
use,  is  the  bank  account.  Money  or  representa- 
tives of  credit  are  deposited  in  the  bank  and 
drawn  upon  to  meet  current  needs.  The  man 
who  works  for  a  salary  frequently  deposits  in 
full  the  check  which  he  receives  for  the  month, 
drawing  upon  it  subsequently  for  all  the  various 
bills  of  the  previous  month  and  for  such  items 
of  the  current  month  as  require  ready  cash.  In 
this  way  he  avoids  the  necessity  of  handling 
any  considerable  share  of  the  money  which  he 
earns.  The  instrument  used  in  withdrawing 
money  from  the  bank,  or  transferring  credit  to 
others,  is  the  bank  check.  It  is  a  very  brief 
and  informal  order,  bearing  a  date  and  directing 
the  bank  to  pay  to  the  person  named  or  to  his 
order  a  specified  sum.  The  following  is  the 
usual  form  : 

No.  199.  New  York  City,  Jan.  i,  1896. 

Centennial  National  Bank. 

Pajf  to  the  order  of  IVilliam  Jones 

Fifty. ^  Dollars. 

$  SO.'ASr  Richard  Palmer. 


250  ECONOMICS 

For  the  convenience  of  the  user  blank  checks 
are  usually  bound  together,  each  with  a  stub 
attached  with  blanks  for  number,  date,  name  of 
person  in  whose  favor  the  check  is  drawn, 
balance  remaining  before  check  is  drawn, 
amount  of  check,  balance  after  deducting  check, 
and  for  the  amount  of  any  deposits. 

The  use  of  checks  by  private  persons  in  ordi- 
nary business  transactions  is  much  more  gen- 
eral in  England  and  America  than  in  the 
countries  of  continental  Europe,  where  it  is 
more  customary  for  small  depositors  to  apply 
at  the  bank  in  person  when  money  is  needed. 
Bank  credits  are  an  economy  of  the  circulating 
medium,  varying  in  extent  with  the  length  of 
time  between  the  drawing  and  the  presentation 
of  checks.  The  system  secures  greater  safety 
than  the  practice  of  hoarding  money  at  home  or 
carrying  it  about  the  person.  It  enables  the 
community  to  utilize  a  greater  proportion  of  its 
spare  cash,  since  the  banks,  as  has  been  ex- 
plained, need  not  keep  on  hand  all  the  money 
against  which  depositors  are  entitled  to  draw. 
Most  important  of  all,  from  the  standpoint  of 
the  individual  depositor,  is  the  personal  conven- 


THE  ORGANIZATION  OF  CREDIT  25 1 

ience  in  making  payments.  Checks  may  be 
sent  through  the  mail  or  by  messenger  with 
entire  safety,  since  lost  checks,  if  reported  by 
number  to  the  bank  upon  which  they  are 
drawn,  may  be  refused  payment.  Checks  need 
not  be  presented  at  the  bank  where  the  money 
is  deposited,  but  will  be  paid  at  any  bank  where 
the  drawee  is  known.  A  person  who  receives 
in  the  course  of  the  day  checks  from  various 
sources  upon  different  banks,  may  deposit  them 
all  to  his  own  credit  in  the  bank  where  his 
account  is  kept. 

This  thorough  organization  of  private  busi- 
ness credit  is  of  great  economic  importance. 
The  volume  of  business  may  be  very  much 
more  extensive  and  complicated  than  under  a 
system  of  cash  payments.  It  permits  many 
transactions  which  would  not  be  possible  at  all, 
if  the  surplus  cash  of  individuals  were  not  thus 
collected  into  larger  funds,  and  if  the  check 
system  did  not  insure  easy  transfers  of  credit. 
The  abuse  to  which  it  is  subject  in  the  too  fre- 
quent use  of  checks  for  petty  amounts  is  easily 
controlled  by  the  practice  of  charging  a  small 
fee   for   exchange.       This    practice   is   adopted 


252  ECONOMICS 

most  frequently  in  the  case  of  isolated  banks 
which  do  not  have  easy  communication  with 
other  banks,  and  especially  when  exchanges  be- 
tween the  community  of  which  it  is  the  credit 
centre  and  the  other  communities  with  which 
it  deals  do  not  balance  each  other.  In  such 
cases  the  bank  must  send  or  receive  money  and 
a  charge  must  be  made  to  cover  the  cost. 

The  next  step  in  the  development  of  credit  is 
the  organization  of  a  system  by  which  banks 
may  easily  adjust  their  balances  with  each  other. 
Under  the  check  system  each  bank  will  receive 
during  the  day  the  checks  of  many  other  banks, 
and  its  own  will  be  widely  distributed.  Since 
such  a  multitude  of  private  persons  are  con- 
cerned in  these  transactions  whose  credit  is 
continually  shifting,  and  since  some  of  them 
may  have  overdrawn  their  accounts,  it  is  essen- 
tial that  each  check  should  promptly  reach  the 
bank  against  which  it  is  drawn  in  order  that  its 
character  may  be  ascertained.  This  is  accom- 
plished through  the  Clearing  House,  or  associa- 
tion of  banks.  In  an  incredibly  short  space  of 
time,  after  the  presentation  by  each  bank  of  the 
checks  which  it  has  cashed  for  other  banks,  its 


THE  ORGANIZATION  OF  CREDIT  253 

own  liability  for  checks  cashed  elsewhere  is 
ascertained  and  a  statement  of  the  balance, 
whether  favorable  or  unfavorable,  is  presented. 
This  balance  may  be  settled  in  money  or  in 
clearing-house  certificates.  The  clearing  house 
is  thus  a  bank  which  deals  in  the  credit  of  other 
banks,  and  its  economy  lies  in  the  same  direc- 
tion as  that  indicated  for  banks  in  general. 
The  real  saving  of  time  and  of  the  necessity  for 
using  money  is  most  fully  revealed  in  the  clear- 
ing-house transactions  of  the  large  cities.  Only 
a  minute  fraction  of  the  total  business  transac- 
tions finally  requires  the  use  of  money.  By  far 
the  greater  part  consists  of  transfers  of  credit. 

The  word  ''draft"  is  commonly  used  to  desig- 
nate the  order  drawn  by  one  bank  upon  another. 
It  differs  in  no  respect  from  a  personal  check, 
except  that  it  is  preferred  for  exchange  between 
cities,  because  it  is  easier  as  a  rule  to  learn  the 
standing  of  a  bank  than  of  an  individual ;  but 
even  this  is  a  question  of  degree  only^i  and  there 
are  many  private  persons  whose  financial  stand- 
ing is  so  well  known  that  their  personal  check 
would  be  accepted  as  readily  as  the  draft  of  any 
metropolitan  bank. 


254  ECONOMICS 

The  organization  of  international  credit  is 
earlier  in  time  than  the  elaborate  banking  sys- 
tem just  described.  The  occasion  for  it  has 
been  already  explained  in  the  chapter  on  the 
"Distribution  of  Products."  ^  In  the  complexity 
and  vast  extent  of  modern  commerce  it  rests 
upon  credit  in  an  ever  increasing  extent.  Bills 
of  exchange  are  bought  and  sold  as  are  other 
articles  of  international  commerce,  and  their 
rates  vary  with  the  exportation  and  importation 
of  goods.  If  the  exchange  of  products  between 
two  countries  is  in  equilibrium,  exchange  will 
be  at  par,  2>.,  it  will  be  as  easy  to  pay  a  debt 
in  the  foreign  country  as  at  home.  If  more 
goods  are  imported  so  that  the  balance  of  trade, 
as  the  saying  is,  becomes  unfavorable,  the  rate 
of  foreign  exchange  will  rise  until  it  reaches  a 
point  at  which  it  is  more  profitable  to  ship  gold 
abroad  than  to  buy  the  foreign  bills.  Inversely, 
if  more  goods  are  exported  so  that  there  is  a  tend- 
ency for  gold  to  flow  in  from  foreign  countries, 
those  who  have  payments  to  make  abroad  will 
find  an  advantageous  rate  of  exchange,  since 
there  will  be  in  the  foreign  country  many  persons 

1  See  Chapter  X. 


THE  ORGANIZATION   OF   CREDIT  255 

eager  to  accept  the  bills  of  exchange  which  to 
that  extent  relieve  the  demand  for  gold. 

Another  form  of  credit  which  does  not  imply 
the  existence  of  banks,  though  it  furnishes  to 
them  a  large  part  of  their  business,  is  the  bor- 
rowing of  capital  on  promissory  notes  for  a  stipu- 
lated time,  and  at  a  stipulated  rate  of  interest. 
By  this  means  capital  is  transferred  from  owners 
who  have  no  use  for  it,  or  who  desire  only  a 
regular  income  from  it  of  moderate  amount,  to 
others  who  believe  themselves  to  be  in  position 
to  use  it  advantageously.  This  ability  to  bor- 
row depends  upon  the  credit  of  the  borrower, 
which  in  exceptional  cases  has  no  other  founda- 
tion than  personal  character  of  the  kind  that 
inspires  confidence.  As  a  rule,  some  security 
is  required.  The  wealth  pledged  as  security 
need  not,  however,  be  withdrawn  from  active 
production,  so  that  the  borrower  is  able  to  in- 
crease his  available  capital  by  the  extent  of  his 
credit.  Closely  analogous  to  this  variety  of 
credit  is  the  formation  of  partnerships  in  which 
capital  is  furnished  by  persons  who  do  not  other- 
wise engage  in  the  proposed  enterprise.  Before 
it  was  permitted  to  loan  money  at  interest  in 


256  ECONOMICS 

England,  it  was  very  common  to  form  partner- 
ships of  this  kind  in  which  owners  of  capital 
obtained  a  share  of  the  profit.  There  was 
thought  to  be  no  impropriety  in  securing  such 
return  for  the  use  of  capital,  since  the  capital 
shared  in  the  risk  of  the  enterprise.  By  both 
of  these  methods  the  immediate  control  of  capi- 
tal is  placed  in  the  hands  of  business  men  of 
greater  efficiency  and  skill  than  its  original 
owners  possess,  or,  at  least,  in  the  hands  of  men 
who  are  willing  to  employ  it  actively  in  com- 
merce or  industry.  There  is  no  certainty  that 
ability  in  industrial  management  will  accompany 
the  ownership  of  capital,  particularly  where  laws 
permit  the  inheritance  of  wealth.  The  general 
welfare  of  society  is  promoted  by  a  system  of 
credit,  which  permits  its  employment  to  pass 
into  the  hands  of  such  persons  as  find  them- 
selves able  to  make  the  best  use  of  it.  There 
is  at  present  no  better  test  of  this  than  the  rate 
of  interest  which  borrowers  are  respectively  able 
to  pay. 

Banks  deal  in  this  kind  of  credit  as  a  part  of 
their  regular  function.  Whatever  portion  of 
their  deposits  is  not  needed  as  a  reserve  fund  for 


THE  ORGANIZATION   OF   CREDIT  25/ 

the  transaction  of  daily  business  is  free,  for  loans 
at  interest,  and  their  facilities  for  learning  the 
financial  standing  of  their  customers  gives  them 
unusually  good  opportunities  for  lending  their 
own  capital  to  advantage.  But  the  business  is 
by  no  means  confined  to  banks.  Private  indi- 
viduals may  lend  directly,  or  they  may  lend  their 
savings  through  special  associations  which  pay 
interest  upon  sums  intrusted  to  them.  Most 
conspicuous  among  these  are  the  savings  banks 
and  the  building  associations.  Life-insurance 
companies  also  afford  an  excellent  opportunity 
for  the  safe  investment  of  moderate  amounts. 
In  the  aggregate  the  funds  collected  by  these 
various  agencies  are  very  large,  and  a  heavy  re- 
sponsibility for  their  judicious  employment  rests 
upon  their  officers. 

Two  additional  forms  of  credit  may  be  con- 
sidered together,  as  their  economic  character  is 
identical,  whatever  their  legal  and  political  differ- 
ence. Bank-notes  and  government  issues  of 
paper,  or  of  subsidiary  coinage  which  is  valued 
at  more  than  the  worth  of  the  bullion,  are  alike 
representatives  of  credit.  If  convertible  in- 
stantly upon  demand  into  standard  money,  they 


258  ECONOMICS 

are  the  equivalent  of  money,  in  the  same  way 
that  checks  are  the  equivalent  of  wealth  deposited 
with  the  banker.  They  permit  an  economy  of 
more  expensive  kinds  of  money  and  are  there- 
fore useful.  For  the  same  reasons  that  the 
banking  system  releases  a  portion  of  the  capital 
of  a  community  for  productive  purposes,  repre- 
sentatives of  credit  virtually  increase  the  cur- 
rency by  whatever  amount  of  money  need  not 
be  kept  constantly  on  hand  for  their  redemption. 
If  not  legally  convertible  into  standard  money, 
they  may  still  circulate  side  by  side  with  it,  pro- 
vided the  quantity  is  not  excessive.  Whenever 
the  total  quantity  of  money,  including  the  rep- 
resentatives of  credit,  exceeds  the  demands  of 
business,  the  high  prices  which  result  will  ne- 
cessitate an  exportation  of  money.  Naturally  it 
is  the  standard  money  that  will  be  driven  out  of 
circulation.^  If  the  inflation  continues  after  the 
diminution  of  the  currency  caused  by  the  disap- 
pearance of  the  money  which  can  be  used  abroad, 
prices  may  continue  to  rise  to  any  extent,  as  the 
international  regulator  of  prices  has  been  ren- 
dered inoperative.     There  is  no  other  remedy  ex- 

1  See  p.  228. 


THE  ORGANIZATION   OF  CREDIT  259 

cept  the  calling  in  of  a  portion  of  the  excessive 
issues  until  there  is  again  an  equilibrium  be- 
tween the  volume  of  business  and  the  volume  of 
money. 

Bank-notes  resemble  ordinary  promissory 
notes,  but  are  without  interest  and  payable 
upon  demand  of  the  holder.  Where  there  is 
no  arbitrary  restriction  upon  the  issue  of  such 
notes,  the  amount  which  any  particular  bank 
can  keep  in  circulation  will  depend  chiefly  upon 
the  average  time  allowed  to  lapse  between  issue 
and  presentation  for  payment.  This  in  turn 
depends  in  part  upon  the  credit  of  the  bank  and 
the  willingness  of  people  in  general  to  receive 
the  bank-notes  as  money,  and  in  part  upon  the 
requirements  for  business  for  a  medium  of  ex- 
change. If  money  is  scarce,  the  bank-notes 
will  remain  longer  in  circulation,  the  credit  of 
the  bank  remaining  the  same.  This  is  equally 
true  of  government  issues,  if  they  are  payable 
on  demand,  and  there  is  ready  access  to  the 
places  where  they  may  be  presented.  This  ele- 
ment of  the  currency  is  a  useful  one  as  a  means 
of  assuring  greater  elasticity  than  is  provided  by 
the  use  of  coin,  and  its  usefulness  is  greatest 


260  ECONOMICS 

when  the  banks,  which  are  entitled  to  issue 
notes,  are  most  widely  distributed  and  thus 
most  directly  in  contact  with  actual  business 
demands.^ 

1  The  dangers  from  such  an  elastic  currency  should  not  be 
overlooked.  Professor  Hadley  thus  describes  what  may  occur. 
"  If  it  becomes  easy  to  obtain  the  accommodation  at  the  banks, 
a  large  number  of  transactions  will  be  made  on  credit.  The 
checks  which  result  from  the  creation  of  such  bank  credit  fur- 
nish a  medium  of  exchange  almost  as  efficient  as  money.  The 
over-abundance  of  a  medium  of  exchange  in  this  form  will 
make  it  easier  to  get  money  than  it  was  before.  This  will  tend 
to  raise  prices.  .  .  .  This  .  .  .  may  continue  until  the  liabilities 
of  the  banks  become  disproportionate  to  their  reserves.  When 
the  public  perceives  this,  there  is  a  sudden  shock  to  confidence 
and  a  withdrawal  of  accommodation  which  causes  far  greater 
distress  than  would  have  resulted  had  the  facilities  for  pay- 
ment by  credit  been  less  elastic  at  the  outset."  —  Economics, 
pp.  246-247. 


CHAPTER   XIII 

THE   ORGANIZATION    OF   INDUSTRY 

In  a  previous  chapter  on  the  making  of  goods 
we  made  a  broad  survey  of  the  economic  activi- 
ties of  human  society,  describing  the  making 
of  goods  as  the  entire  series  of  activities  by 
which  man  secures  from  his  surroundings  the 
satisfactions  which  his  nature  demands.  The 
brief  account  given  in  that  chapter  was  from 
the  outside  only,  as  we  might  describe  the  in- 
dustrial activity  of  a  colony  of  bees.  We  have 
now  gone  far  enough  into  the  explanation  of 
wealth  to  enable  us  to  view  the  industrial  or- 
ganization of  society  from  the  inside  and  to 
attempt  an  analysis  of  the  industrial  factors. 

Human  industry,  as  a  whole,  is  like  a  great 
stream  which  flows  continuously  under  the 
management  of  man  from  its  sources  in  the 
natural  forces  to  its  destination  in  the  supply  of 
the  wants  of  man.  The  stream  is  made  up  of 
products  continually  changing  as  it  rolls  on, 
261 


262  ECONOMICS 

until,  at  its  mouth,  it  discharges  only  products. 
Four  elements  are  clearly  distinguishable  as  we 
watch  it :  the  unfinished  products;  the  physical 
energy  which  makes  their  motion  and  trans- 
formation possible ;  the  human  labor  which 
transfers  the  energy  to  the  material  product, 
though  it  is  itself  a  form  of  that  energy ;  and 
the  intelligence  which  directs  the  general 
course  of  the  stream.  It  is  clear  that  all  of 
these  four  elements  are  essential  to  the  indus- 
trial product.  Let  us  begin  with  the  unfinished 
products  themselves. 

As  soon  as  they  are  seized  upon  by  man, 
however  much  they  may  resemble  natural  prod- 
ucts in  appearance,  they  are  in  fact  industrial 
products.  On  the  other  hand,  however  much 
they  may  resemble  goods  for  immediate  con- 
sumption, they  serve  a  different  purpose  in  that 
they  are  to  be  employed  in  further  production. 
They  may  be  regarded  as  unfinished  or  future 
goods.  The  satisfaction  which  their  produc- 
tion was  intended  to  meet  will  not  be  realized 
until  the  commodity  which  is  to  be  consumed 
has  actually  been  produced.  The  plough,  the 
wagon,  and  the  reaper,  in  so  far  as  they  are  used 


THE  ORGANIZATION  OF   INDUSTRY         263 

in  the  production  of  wheat,  may  be  regarded 
as  wheat  not  yet  ready  for  consumption.  They 
have  no  reason  for  existence  except  as  they 
bring  nearer  that  for  the  production  of  which 
they  were  themselves  produced. 

To  be  clearly  distinguished  from  these  future 
goods  are  the  present  goods  which  minister 
directly  to  the  satisfaction  of  human  desires. 
Food,  clothing,  and  fuel  used  in  protection 
against  cold  are  obviously  present  goods. 
Commodities  which  satisfy  higher  desires  —  as 
paintings,  ornaments,  and  articles  of  household 
furniture — are  of  the  same  kind.^  The  spoken 
oration,  the  musician's  notes,  and  the  plunge  of 
the  surgeon's  knife  are  goods  in  the  economic 
sense,  and  furnish  excellent  examples  of  the  class 
of  goods  under  consideration.  The  goods  which 
have  ultimately  taken  form  as  present  goods, 
have  been  at  various  stages  of  their  production 
future  goods.  They  have  become  present  goods 
through  the  operation  of  productive  agencies. 
They  were  products;  they  have  become  produce.^ 

1  Clark,  Philosophy  of  Wealth,  Chapter  I. 

2  Patten,  **  Fundamental  Idea  of  Capital,"  in  Quarterly 
Journal  of  Economics,  Vol.  III.,  p.  193. 


264  ECONOMICS 

The  future  goods  are  of  two  distinct  kinds. 
There  are  those  which  will  reappear  visibly  in 
the  finished  product,  as  wood,  cotton,  flax,  and 
coloring  matter  in  cloth,  leather  in  shoes,  etc.;^ 
and  those  which  will  not  thus  reappear,  as  coal, 
bleaching  material,  lubricants,^  and  the  build- 
ings which  have  been  required  in  the  produc- 
tion. Goods  of  the  first-mentioned  class  are 
themselves  on  the  way  to  the  goal  of  consump- 
tion. Those  of  the  second  are  aiding  in  the 
transformation  of  other  future  goods  into  pres- 
ent goods.  If  the  produce  of  industry  under 
consideration  be  bread,  the  labor  that  has  been 
expended  in  its  production  has  taken  form  on 
the  one  side,  at  different  stages,  as  plant  food, 
wheat,  flour,  and  dough  ;  and  the  other  as  im- 
provement on  land,  agricultural  machinery, 
wagon,  railroad,  flour  mill,  and  baker's  oven. 
The  latter  are  fundamentally  of  the  same  eco- 
nomic character  as  the  former.^  Future  goods  of 
the  first  class  are  called  by  Clark  passive  capital, 

^  Andrews,  Institutes  of  Economics^  p.  49. 

2  Ibid. 

3  A  plough  is  so  many  loaves  of  bread  partly  made,  while  a 
loom  and  the  engine  which  moves  it  are  partly  made  coats; 
that  is,  society  having  determined  to  make  some  more  bread 


THE  ORGANIZATION   OF  INDUSTRY         265 

those  of  the  second  active  capital.^  These  prod- 
ucts of  human  industry  which  owe  their  exist- 
ence and  their  value,  not  to  their  power  to 
satisfy  immediately  human  desires,  but  to  the 
great  fact  of  the  efficiency  of  serial  production, 
are  future  goods. 

Though  material  commodities  only  are  ordi- 
narily included  in  the  term  **  future  goods,"  it 
should  be  pointed  out  that  there  are  other  pro- 
ductive agencies  which  are  entirely  analogous 
in  their  action.  Andrews  refers  to  some  of 
them  as  "unembodied  inventions,"  and  cites 
the  knowledge  of  chemical  combinations  used 
in  the  arts,  etc.  The  patterns  of  a  stove  manu- 
facturer, often  very  valuable,  are  of  course  fut- 
ure goods  ;  yet  if  the  patterns  themselves  were 
destroyed,  they  could  usually  be  replaced  at 
nominal  expense  by  one  who  remembered  their 
form.  The  result  of  an  invention,  whether 
of  a  pattern,  a  chemical  combination,  or  a  me- 
chanical process  is  only  under  very  exceptional 

and  coats,  is  so  far  along  in  the  work  that  it  has  made  a  plough, 
a  loom,  and  an  engine  to  propel  it.  — Patten,  see  p.  263. 

1"  Capital  and  its  Earnings,"  in  Publications  of  the  American 
Economic  Association^  Vol.  III.,  Noi  2. 


266  ECONOMICS 

circumstances  wholly  embodied  in  a  physical 
form.  The  improvement  of  agricultural  land 
may  take  such  tangible  form  as  to  be  easily  rec- 
ognized as  a  material  product  —  a  future  good  ; 
or  it  may  consist  simply  in  an  improvement  in 
the  quality  of  the  soil.  Labor  may  be  expended 
in  the  erection  of  agricultural  stations  in  order 
to  increase  production.  The  result  is  then 
clearly  a  future  good  —  a  product  of  industry. 
Essentially  the  same  thing  is  done  when  labor 
is  expended  in  the  training  of  laborers  to 
greater  efficiency.  The  qualities  of  man  are 
improved  as  were  those  of  the  soil  in  the  illus- 
tration above  given.  Finally,  labor  may  be 
expended  in  the  production  of  future  goods, 
such  as  machinery,  tools,  and  factory  build- 
ings. It  is  better  to  reserve  the  term  "future 
goods"  for  these  material  commodities,  using  the 
broader  term  "capital"  to  designate  the  results 
of  all  labor  exerted  before  that  which  performs 
the  final  act  of  transforming  the  future  into  a 
present  good.  Capital  is  embodied  labor,  but 
it  is  labor  expended  beforehand  in  order  to 
increase  the  produce.  Viewing  the  production 
of  wealth,  rather  than  its  consumption,  looking 


THE  ORGANIZATION  OF  INDUSTRY         267 

not  upon  man's  pleasures,  but  upon  the  indus- 
trial organization  —  we  thus  get  a  clear  idea  of 
capital  and  its  function.  It  does  not  include 
the  means  of  subsistence  in  the  hands  of  their 
final  consumers,  or  any  commodities  which  will 
directly  satisfy  the  wants  of  man  and  are  desired 
by  men  on  their  own  account. 

Whether  capital  is  a  productive  agency,  is  a 
question  of  economic  theory  over  which  a 
severe  struggle  has  continued  to  the  present 
day.  The  least  that  can  be  claimed  for  the 
productive  power  of  capital  is  that  the  produc- 
tive agencies  are  far  more  efficient  where  there 
is  a  relatively  large  stock  of  future  goods  in 
existence,  where  the  serial  method  of  produc- 
tion is  in  full  vogue,  where  a  portion  of  the 
labor  necessary  to  satisfy  a  man's  desires  is 
exerted  long  in  advance  of  the  period  when  the 
commodity  is  to  be  consumed.^ 

It  is  evident  that  a  society  which  maintains 

1  The  value  of  the  unfinished  commodity,  the  product  of  in- 
dustry, depends  upon  the  distance  which  separates  it  from  the 
finished  stage.  When  products  are  exchanged  for  produce,  it  is 
always  at  a  certain  advantage  to  the  holder  of  the  former,  pro- 
vided he  is  able  and  willing  to  sacrifice  thus  a  lower  degree  of 
pleasure  in  the  present  for  a  higher  in  the  future. 


268  ECONOMICS 

a  judicious  proportion  between  the  quantities 
of  future  and  present  goods  will  add  thereby 
greatly  to  the  satisfactions  which  it  may  enjoy. 
But  it  is  essential  further  that  the  various 
classes  of  future  goods  should  bear  to  each 
other  a  certain  proportion  determined  in  each 
case  by  the  requirements  of  the  industrial  or- 
ganization. If  the  object  be  to  bring  coal  to 
the  consumers,  the  future  goods  called  into 
requisition  are,  among  others,  mine  machinery, 
road  bed,  and  rolling  stock.  Individual  pro- 
ducers sometimes  put  too  large  a  portion  of  the 
available  energy  into  the  construction  of  rail- 
ways, leaving  not  enough  free  for  the  production 
of  machinery  or  for  the  mining  industry  itself.^ 
The  expenditure  of  labor  too  long  beforehand 
is  not  to  be  justified.  Production  will  be  most 
efficient  when  the  quantities  of  labor  devoted 
to  the  various  classes  of  future  goods  are  most 
nicely  adjusted. 

The  distinction  between  circulating  and  fixed 
capital  has  long  been  current  and  is  useful  for 

1  Panics  have  sometimes  ensued  when  too  much  of  the 
national  capital  is  in  railroads.  It  becomes  under  such  circum- 
stances both  hxed  and  specialized.     See  next  two  paragraphs. 


THE   ORGANIZATION   OF  INDUSTRY         269 

certain  practical  purposes.  Circulating  capital 
consists  of  such  future  goods  as  fulfil  the  whole 
of  their  ofBce,  in  the  production  in  which  they 
are  engaged,  by  a  single  use;  fixed  capital  of 
such  as  exist  in  any  durable  shape,  and  the  use 
of  which  in  production  is  spread  over  a  period 
of  corresponding  duration.^  Much  of  what  is 
ordinarily  classed  as  circulating  capital  is,  how- 
ever, excluded  entirely  from  the  category  of 
future  goods,  and  consequently  of  capital  as 
above  defined.  Nothing  is  more  common  in  the 
political  economy  of  the  wage-fund  period  than 
discussions  as  to  whether  laborers  suffer  from 
the  transformation  of  circulating  capital  into 
fixed  capital.  This  discussion  has  no  mean- 
ing unless  we  understand  by  circulating  cap- 
ital mainly  subsistence.  But  food  and  clothing 
are  present  goods  —  not  capitalistic  products  — 
and  they  should  not  be  reckoned  as  capital.  The 
line  between  fixed  and  circulating  capital  has 
always  been  a  very  uncertain  one,  and  since  the 
line  which  separates  future  from  present  goods 
can  be  more  distinctly  drawn,  the  utility  of  the 
older  distinction   is   questionable.     If   it    is  re- 

^  Mill,  Principles  of  Political  Economy^  Bk.  I.,  Chapter  VI. 


270  ECONOMICS 

tained,  and  we  seek  an  illustration  in  steamship 
transportation,  we  would  place  the  vessel  itself, 
as  well  as  the  permanent  offices  and  the  docks 
of  the  steamship  company,  on  the  side  of  fixed 
capital;  while  the  fuel  consumed  in  the  steamer, 
the  supply  of  provisions  necessary  for  the  voy- 
age,^ and  all  those  portions  of  the  equipment  of 
vessels,  docks,  or  offices  which  need  to  be  con- 
tinually renewed,  furnish  the  circulating  capital. 
The  paint  renewed  at  every  port  would  figure 
in  the  circulating  capital  of  the  steamship  line, 
though  it  would  be  less  "  circulating "  than 
the  fuel  which  lasts  in  the  furnace  but  a  few 
minutes. 

Specialized  capital,  by  which  is  meant  those 
future  goods  which,  to  avoid  waste,  must  be 
carried  forward  to  a  particular  goal,  as  print- 
ing-presses to  the .  production  of  books  and 
newspapers,  steam  engines  to  some  form  of 
production  in  which  steam  power  is  required, 
and   steel   to   the   form   of   edged   tools,    rails, 

1  Until  they  are  prepared  for  the  table  and  actually  placed 
before  passengers,  when  they  become  present  goods,  and  con- 
stitute an  integral  part  of  the  "  good "  for  which  the  passage 
money  has  been  paid. 


THE  ORGANIZATION   OF  INDUSTRY         2/1 

steel-plate,  etc.,  is  distinguished  from  free 
capital,  which  may  with  almost  equal  economy 
be  employed  in  any  one  of  many  different 
kinds  of  production.  This  distinction  is  also 
purely  relative.  A  factory  which  can  be 
transformed  at  small  expense  into  one  suited 
to  the  production  of  a  different  commodity, 
is  less  specialized  than  one  which,  if  the 
transformation  were  necessary,  would  require 
a  greater  outlay  in  effecting  required  changes. 
Individuals  suffer  at  times  from  changes  in 
demand  which  leave  them  in  possession  of 
specialized  and  useless  capital.  Production 
will  be  in  this  respect  most  efficient  when 
changes  are  so  successfully  anticipated  as  to 
prevent  at  such  points  a  too  great  preponder- 
ance of  specialized  capital  over  that  which  is 
free. 

If  capital  in  its  origin  is  not  a  result  of 
saving,  but  rather  a  result  of  the  adoption  of 
a  new  and  more  efficient  method  of  produc- 
tion, then  it  is  evident  that  it  is  increased, 
not  by  reducing  consumption,  but  by  turning 
the  productive  capacity  of  society  into  new 
channels.     An    addition   to   the  stock  of   capi- 


272  ECONOMICS 

tal  is  an  incidental  result  of  the  new  activity, 
not  its  cause.  In  apparent  conflict  with  this 
statement  of  the  relation  of  capital  to  the 
growth  of  industry  are  the  first  two  of  Mill's 
four  fundamental  propositions  concerning  capi- 
tal, viz.  :  that  industry  is  limited  by  capital ; 
and  that  capital  is  the  result  of  saving.  But 
the  word  "saving"  is  used  by  Mill  in  a  tech- 
nical sense,  denoting  not  necessarily  abstinence 
or  privation,  but  merely  *'  excess  of  produc- 
tion over  consumption."  The  essential  ele- 
ment is  even  here  the  activity  which  calls 
the  new  products  into  being.  It  is  of  course 
impHed  that  they  then  be  devoted  to  the  end 
for  which  they  were  produced  and  not  to  some 
other, — that  they  be  "saved  "  from  loss,  waste 
and  unproductive  consumption ;  but  it  is  wholly 
irrelevant  to  say  that  they  are  a  result  of  this 
saving.!     Non-destruction    cannot   be   regarded 

1  "  If  a  child  asked  whence  chickens  came,  and  was  told 
that  to  produce  chickens  he  must  refrain  from  eating  eggs, 
we  should  be  justified  in  regarding  the  answer  as  excellent 
advice,  but  as  an  exceedingly  absurd  explanation.  We  are 
not  a  whit  better  satisfied  by  the  train  of  reasoning  which 
makes  saving  the  original  cause  of  the  formation  of  capital." 
—  Gide,  Principles  of  Political  Economy,  Amer.  ed.,  p.  139. 


THE   ORGANIZATION   OF  INDUSTRY         273 

as  the  origin  of  anything.  Nor  is  it  true 
that  industry  is  limited  by  capital  in  any 
sense  which  is  inconsistent  with  the  proposi- 
tion that  sufficient  capital  is  always  forthcom- 
ing when  the  natural  forces  and  human  energy 
are  directed  into  more  productive  channels. 
The  limitations  are  imposed  by  the  lack  of 
such  energy  and  non-utilization  of  such  forces. 
It  cannot  be  too  strongly  insisted  upon  that 
under  normal  conditions,  i.e.^  when  the  quan- 
tities of  the  various  kinds  of  capital  are  pro- 
duced in  the  right  proportion,  the  increase  of 
capital  involves  no  reduction  in  the  quanti- 
ties of  present  goods  produced,  that  there  is 
no  diminution  of  enjoyment,  that  there  is  no 
necessary  privation  or  sacrifice  other  than 
that  connected  with  the  labor  involved  in  the 
production.  Looking  upon  the  industrial  or- 
ganization from  a  social  and  purely  objective 
standpoint,  we  may  recognize  clearly  enough 
that  these  advantages  from  the  use  of  capital 
are  not  purchased  at  the  cost  of  any  reduction 
of  enjoyment.  At  every  stage,  capital  —  that  is 
to  say,  machinery,  raw  materials,  unfinished 
goods,  improvement  on  land,  increased  abilities 


274  ECONOMICS 

in  men  —  these  are  produced  by  the  cooperation 
of  the  human  and  the  natural  forces.  They 
do  not  add  to  man's  satisfactions  directly, 
but  neither  do  they  subtract  from  them.  In- 
directly but  continuously  they  do  aid  in  satis- 
fying desires.  Contemporaneously  with  their 
own  production  they  are  changing  into  pres- 
ent goods,  or  are  increasing  the  quantities  of 
present  goods,  at  man's  disposal.  Since  the 
very  beginning  of  this  process  there  has  been 
no  necessity  for  saving  as  an  act  of  pi^oductioji. 
Saving  is  the  means  by  which  the  individual 
may  increase  the  amount  of  his  own  income,  the 
means  by  which  he  may  influence  the  distribu- 
tion of  wealth.  It  deserves  attention,  therefore, 
in  the  study  of  distribution.  Unfortunately 
there  is  a  large  class  made  up  of  those  who  are 
unwilling  or  unable  to  save  for  themselves,  who 
do  not  adapt  themselves  to  the  more  efficient 
methods  of  production  in  vogue,  but  steadily 
exchange  their  share  in  the  future  goods  which 
they  help  to  produce  for  such  as*  are  able  to  sat- 
isfy immediate  wants.  While  society  consists 
thus  of  two  classes,  those  who  save  and  those 
who  do  not,  the  distribution  of  wealth  will  be 


THE  ORGANIZATION  OF  INDUSTRY         275 

greatly  in  favor  of  the  former  class.  This  income 
which  they  receive,  because  of  the  failure  of  the 
latter  class  to  act  in  conformity  with  the  newer 
conditions,  is  so  much  deducted  from  the  total 
product  of  industry  before  any  division  among 
those  who  have  actively  cooperated  in  produc- 
tion can  take  place. 

Money  is  circulating  capital  of  a  unique  kind. 
In  any  particular  production  the  money  em- 
ployed fulfils  the  whole  of  its  office  by  a  single 
use,  yet  the  money  itself  may  exist  in  a  durable 
shape,  and  its  entire  service  to  society  may  be 
spread  over  a  period  of  longer  duration  than 
that  of  almost  any  form  of  fixed  capital.  In  the 
popular  mind  the  significance  of  money  in  the 
industrial  mechanism  is  usually  grossly  exagger- 
ated. Its  total  quantity  does  not  measure  in 
any  sense  the  aggregate  wealth  of  the  country, 
nor  does  it  stand  in  any  fixed  relation  to  its 
stock  of  capital.  The  importance  of  the  money 
of  a  country  is  somewhat  greater  than  that  of 
the  weights  and  measures  in  general  use,  but 
its  function  does  not  differ  materially  from 
theirs.  Money  is  used  in  exchanging  goods,  as 
railway  cars   are    used   in   transporting    them. 


2/6  ECONOMICS 

Both  money  and  cars  are  capital,  but  neither 
has  any  exclusive  or  peculiar  claim  to  the  title. 
When  it  is  said  that  money  is  needed  to  de- 
velop the  resources  of  a  particular  section  of 
the  country,  it  is  almost  always  capital  of  other 
kinds  than  money  that  is  really  lacking.  If 
the  supply  of  money  is  really  short,  it  will  be 
attracted  from  other  countries  as  soon  as  pre- 
vailing high  prices  show  that  there  is  a  deficiency. 
But  there  is  no  automatic  method  by  which  the 
supply  of  capital  may  be  increased,  since  a  high 
rate  of  interest  does  not  necessarily  accompany 
a  deficiency  of  capital.  If  the  deficiency  makes 
itself  felt  as  an  obstacle  to  the  development  of 
some  industry,  then  the  rate  of  interest  will 
rise  in  such  a  way  as  to  attract  the  necessary 
capital.  The  need  of  future  goods  is  recognized 
only  gradually  and  on  the  actual  initiation  of 
new  enterprises.  That  they  are  provided  is  an 
indication  of  the  healthy  growth  of  industry. 
The  increase  of  capital  augurs  well  for  further 
development.  An  increase  of  money  beyond 
that  amount  which  the  law  of  international 
prices  allows  is  a  disadvantage,  and  brings  its 
own   remedy.     Society   should   be  much  more 


THE   ORGANIZATION   OF   INDUSTRY         2// 

ready,  therefore,  to  bring  about  the  conditions 
that  call  for  an  increase  of  capital  than  to  in- 
crease artificially  the  money  supply. 

We  may  now  turn  our  attention  to  the  second 
of  the  productive  energies  enumerated  at  the 
beginning  of  this  chapter.  Physical  energy  is 
supplied  by  nature  in  an  inexhaustible  amount. 
No  economist  thinks,  therefore,  of  attaching  any 
importance  to  it  as  a  productive  agency.  But 
it  so  happens  that  most  of  its  available  forms 
are  dependent  upon  one  of  nature's  gifts,  viz., 
land.  Industry  can  be  carried  on  only  upon 
land,  and  its  products  all  find  their  origin  in 
land,  for  by  the  term  we  include  so  much  of 
the  crust  of  the  earth  as  furnishes  to  industry 
any  of  its  original  materials.  There  is  no  get- 
ting access  to  the  natural  forces  under  our  social 
institutions  except  through  land  ownership  or 
rental.  Figuratively  speaking,  therefore,  land 
is  the  economic  form  of  physical  energy.  It  is 
nature's  contribution  to  industry.  It  includes 
rocks  and  soils,  timber,  grass,  and  running 
streams,  —  all  the  forces  of  nature  utilized  by 
man  in  any  branch  of  human  industry.  The 
materials  of  industry  are  drawn  from  land,  the 


2/8  ECONOMICS 

possibility  of  industry  depends  upon  the  con- 
tinued utilization  of  those  forces  which  are  em- 
bodied in  land  and  its  products. 

If  at  any  given  time  an  economic  society  has 
at  its  disposal  much  unoccupied  land  suitable  for 
industry,  it  has  not  merely  standing  room  for  a 
larger  number  of  workers,  but  also  the  physical 
forces  supplied  by  the  sun's  rays  which  fall 
upon  it,  by  the  coal  which  may  lie  buried  be- 
neath it,  by  the  germinating  power  of  its  soils, 
and  even  by  the  animals  which  feed  upon  its 
grasses  and  grains.  The  possession  of  land  — 
at  least  the  privilege  of  working  upon  it  —  is 
the  first  consideration  of  economic  society. 
Without  it  man  cannot  exist.  Any  part  of 
the  entire  product  of  industry  short  of  that 
necessary  to  bare  maintenance  might  be  ex- 
acted by  those  who  control  it  if  they  themselves 
could  become  independent  of  other  equally 
essential  agencies, — an  impossible  condition. 

It  has  been  shown  that  land  considered  as 
a  productive  agency  is  a  more  comprehensive 
term  than  land  in  the  ordinary  use  of  the  term ; 
but  in  certain  other  directions  it  is  more  re- 
stricted  than  in  popular   usage.     It   does   not 


THE  ORGANIZATION   OF   INDUSTRY         279 

include  any  industrial  product.  When  we  speak 
of  land  as  a  source  of  income,  we  usually  include 
many  improvements,  some  recent,  and  others,  it 
may  be,  very  remote.  Land,  sharply  distin- 
guished from  capital  and  other  productive  agen- 
cies, however,  cannot  include  other  than  natural 
products  and  forces.  As  a  French  economist 
has  said,^  we  need  some  ground  to  stand  on, 
rather  more  to  lie  down  on,  vastly  more  to  feed 
our  flocks  and  build  our  factories.  We  need 
further  the  cooperation  of  the  various  forms  of 
physical  energy,  and  this,  too,  depends  upon  the 
possession  of  land. 

An  increase  in  the  supply  of  land  thus  under- 
stood must  always  accompany  any  considerable 
extension  of  industrial  activity,  but  it  by  no 
means  involves  necessarily  the  opening  up  of 
new  land  areas.  Any  discovery  which  leads  to 
a  new  development  of  physical  energy  from  the 
natural  products,  and  forces  now  available,  is  for 
all  practical  purposes  an  increase  in  the  supply  of 
land.  Increased  command  over  the  resources 
of  nature  on  a  given  area  permits  an  extension 
of  industry,  just  as  does  the  occupation  of  new 

1  Gide,  Principles  of  Political  Economy ^  Amer.  Ed.,  p.  99. 


28o  ECONOMICS 

land.  Except  in  new  countries  where  good 
land  is  still  unoccupied,  an  increase  of  land 
means,  as  a  rule,  a  better  use  of  the  possibilities 
of  production  lying  in  the  land  already  occupied, 
but  not  utilized  in  the  most  productive  manner. 
Partly  by  the  discoveries  of  science,  partly  by 
the  diffusion  of  skill,  this  process  of  increasing 
the  usefulness  of  land  goes  constantly  forward, 
and  may  be  indefinitely  continued  long  after 
there  is  no  longer  any  additional  land  area  for 
occupation. 

The  two  remaining  productive  agencies  are 
labor  and  intelligence.  Those  two  are  insepa- 
rably connected  in  man,  as  land  and  capital  are 
inseparably  connected  in  external  nature ;  but 
they  are  distinct  in  function.  Muscular  activity 
presupposes  a  certain  degree  of  rational  direc- 
tion, while  the  highest  degree  of  mental  activity 
remains  subject  to  the  necessity  of  receiving 
bodily  support,  in  which  is  included  muscular 
action.  The  term  "labor"  is  sometimes  used  in 
a  broad  sense  to  designate  all  human  exertion 
directed  toward  productive  ends.  Even  in  its 
broadest  use,  however,  labor  cannot  include  the 
mental  faculties  themselves ;   it  can  refer  only 


THE  ORGANIZATION   OF  INDUSTRY         28 1 

to  the  bodily  activity  which  is  a  condition  to  the 
exercise  of  those  faculties.  Intelligence  is 
clearly  to  be  distinguished  from  the  labor  which 
it  directs.  It  is  true  that  a  man's  labor  must 
be  guided  in  part  by  his  own  intelligence,  but  it 
introduces  needless  confusion  to  class  intelli- 
gence, therefore,  as  a  form  of  labor.  In  the 
study  of  production  it  is  important  to  discover, 
not  how  many  agencies  are  united  under  the 
control  of  the  individual  producer,  but  what 
agencies  there  are.  Not  how  many  different 
sources  of  income  are  open  to  a  single  person, 
but  what  is  the  explanation  of  the  possibility  of 
income,  —  what  are  the  active  forces  that  unite 
to  produce  wealth. 

Man's  energy,  both  mental  and  physical,  is 
to  a  considerable  extent  dependent  upon  outer 
conditions.  These  must  not  be  ignored.  The 
efficiency  of  production  is  determined  in  very 
large  part  by  the  amount  of  human  energy 
which  capitalists  and  laborers  bring  to  their 
task.  Attention  has  already  been  called  to  the 
indirect  influence  of  climate  on  production 
through  its  influence  on  man's  energy  and  in- 
dustrial  activity.     It   is  a  matter   of   common 


282  ECONOMICS 

experience  that  greater  endurance,  heartier  re- 
sponse to  unexpected  demands,  and  more  vigor- 
ous prosecution  of  new  and  uncertain  ventures 
may  be  expected  from  a  people  whose  climatic 
surroundings  are  healthful  and  stimulating  than 
from  those  whose  lives  are  spent  under  unwhole- 
some conditions.  Greatei  energy  is  possible 
where  the  working  day  is  of  reasonable  length, 
where  the  laborer  has  a  direct  interest  in  the 
product  of  his  industry,  where  the  State  is 
active  in  promoting  favorable  conditions  of  life. 
The  degree  of  energy  which  we  may  expect  to 
see  displayed  in  any  community  depends  thus 
partly  on  outward  physical  conditions,  partly  on 
social  and  industrial  conditions  which  the  people 
of  the  community  themselves  create.  Every- 
thing which  contributes  to  the  hopefulness  and 
cheerfulness  of  the  laborer,  everything  which 
adds  to  his  physical  strength  and  his  mental 
power,  because  they  have  these  results,  deserve 
mention  in  any  enumeration  of  the  productive 
agencies.  If  they  are  found  to  be  incapable  of 
modification  by  man,  they  should  be  intelligently 
utilized.  If  they  are  found  to  be  within  the 
sphere  of  man's  influence,  they  should  be  sys- 


THE  ORGANIZATION  OF  INDUSTRY         283 

tematically  developed  and  encouraged  to  the 
end  that  the  highest  degree  of  human  energy 
may  be  secured. 

The  real  importance  of  labor  has  been  much 
obscured  by  two  equally  persistent,  but  equally 
vain,  attempts  to  unduly  exalt  its  significance. 
The  attempt  has  been  made,  first,  to  find  in  the 
amount  of  labor  that  has  been  expended  upon 
the  production  of  an  article  an  explanation  of 
its  present  value ;  but  the  attempt  has  failed  to 
supply  either  a  satisfactory  economic  theory 
of  value  or  a  practical  guide  to  its  measure- 
ment. It  has  been  attempted,  secondly,  to 
show  that  wages  are,  or  should  be,  in  proportion 
to  the  actual  sacrifice  involved  in  the  labor  for 
which  wages  are  paid.  Without  anticipating 
further  the  discussion  of  distribution  and  of 
individual  income,  it  may  be  said  that  the  sacri- 
fice at  most  measures  the  cost  of  such  labor  to 
the  laborer,  not  its  value  in  the  market,  and  can 
account  therefore  only  for  a  minimum  share  in 
distribution  —  a  minimum  to  which  any  consid- 
erable body  of  producers  seldom  sinks. 

Labor,  then,  — bodily  exertion  involving  some 
degree  of  sacrifice,  either  of  pleasure  or  comfort, 


284  ECONOMICS 

—  is  an  essential  in  all  wealth  production. 
Labor  in  all  its  forms  either  produces  or  resists 
motion.  Displacement  of  material  bodies,  or  a 
rearrangement  of  their  parts,  is  the  utmost  that 
labor  can  accomplish.^  It  is  seldom  that  the 
entire  series  of  motions  which  the  production 
calls  for  is  accomplished  by  human  labor  alone. 
When  bodies  have  been  placed  in  the  proper 
situation,  natural  forces  operate  through  ma- 
chines in  the  same  way  as  through  the  human 
body.  Invention  is  continually  transferring 
new  portions  of  the  series  to  machinery,  but 
the  necessity  for  labor  remains.  The  increased 
use  of  machinery  has  not,  and  probably  will  not, 
cause  a  sufficient  increase  in  the  amount  of 
wealth  produced  to  meet  the  new  wants  devel- 
oped with  social  progress.  We  may  look  for 
fewer  hours  of  labor  each  day  for  those  whose 
working  day  now  greatly  exceeds  the  limits  of 
efficiency  ;  we  may  look  for  a  release  from  bru- 
talizing forms  of  labor  ;  but  it  is  scarcely  pos- 
sible   that    there    will    be   a   decrease   in   the 

1  Man  has  no  other  means  of  acting  on  matter  than  by  mov- 
ing it.  —  Mill,  Principles  of  Political  Economy y  People's  Ed., 
p.  16.     See  also  Gide  and  Fawcett  on  this  subject. 


THE  ORGANIZATION   OF  INDUSTRY         285 

aggregate  demand  for  labor,  a  decrease,  in 
other  words,  in  the  advantage  which  society 
will  realize  from  the  possession  of  a  high  de- 
gree of  human  energy  ready  to  be  applied  to 
industrial  labor. 

Looking  again  upon  labor  as  a  moving  of 
material  bodies,  it  will  be  seen  that  its  effi- 
ciency depends  upon  :  first,  the  quantity  of 
motion  produced ;  second,  the  precision  of  the 
motion  ;  third,  the  certainty  that  the  motion  will 
be  produced  at  the  right  time  and  with  suffi- 
cient rapidity  ;  fourth,  the  certainty  that  the 
motion  will  be  in  the  right  direction,  or,  more 
generally,  that  of  several  possible  motions  ex- 
actly the  right  one  will  be  made.  The  quan- 
tity of  motion  which  the  individual  laborer  can 
produce  —  the  number  of  times  that  he  can  re- 
peat the  series  of  motions  for  which  his  posi- 
tion in  the  industrial  mechanics  calls  —  depends 
upon  the  quantity  and  quality  of  his  food,  on 
the  clothing  and  shelter  with  which  he  is  pro- 
vided, and  on  the  other  conditions  of  a  high 
degree  of  human  energy,  some  of  which  were 
enumerated  in  the  paragraphs  on  that  subject. 

Precision,    promptness,  rapidity,  and  the  de- 


286  ECONOMICS 

gree  of  judgment  necessary  to  guide  the  work- 
man in  the  selection  of  tools,  and  of  the  right 
use  to  be  made  of  them  at  the  moment  when 
they  are  to  be  used,  — these  are  qualities  which 
require  training  and  systematic  encouragement. 
We  are  not  concerned  here  with  the  intelli- 
gence necessary  to  invention,  to  discovery,  or  to 
that  kind  of  superintendence  which  requires 
frequent  decision  of  new  questions,  least  of  all 
with  the  intelligence  necessary  to  initiate  new 
industries  or  to  modify  seriously  the  methods 
of  production  employed  in  those  already  estab- 
lished ;  but  with  the  qualities  necessary  in  any 
efficient  labor,  even  when  directed  by  others. 
Whatever  may  be  said  of  the  higher  types  of 
intelligence,  it  is  certain  that  by  proper  train- 
ing these  qualities  may  be  developed  in  every 
class  to  some  extent.  The  industrial  efficiency 
of  the  nation  would  be  vastly  increased  if  by 
schools  of  manual  training ;  by  technological 
schools ;  by  courses  in  the  public  schools  in 
cooking,  sewing,  carving,  drawing,  singing;  by 
systematic  courses  in  athletics ;  and  by  every 
other  possible  means  the  future  workingmen 
— that   is  to  say,  all  women  and  men  —  were 


THE  ORGANIZATION  OF  INDUSTRY         28/ 

taught  more  completely  the  use  of  their  bodies, 
were  trained  to  keep  their  organs  under  better 
control,  and  to  move  them  with  grace  and  pre- 
cision, and,  when  necessary,  with  promptness, 
rapidity,  and  force.  The  attempts  at  this  kind 
of  instruction  have  been  numerous,  but  seldom 
continued  for  a  sufficient  time,  or  introduced 
over  a  sufficient  area  to  afford  any  test  of  its 
efficacy.  We  need  a  State  policy  of  popular 
education,  framed  with  this  pressing  industrial 
need  in  view,  applied  persistently  without  too 
careful  regard  to  local  prejudices,  and  including 
adequate  provision  for  systematic  training  of 
the  teacliers  in  the  courses  which  they  would 
be  expected  to  add  to  those  already  given. 

It  is  not  sufficient  for  wealth  production  that 
motion  be  imparted  to  particles  of  matter,  even 
if  that  motion  be  well  adapted  to  accomplish 
its  immediate  end.  What  bodies  shall  be 
moved.?  What  degree  and  what  kind  of  mo- 
tion shall  be  applied  ?  What  combinations  of 
motion  are  necessary  to  produce  the  desired 
commodity  ?  These  questions  must  be  care- 
fully decided  before  the  point  is  reached  when 
labor  can  be  applied  in  production.     Discovery 


288  ECONOMICS 

of  the  essential  relations  between  the  various 
productive  agencies,  invention  of  new  processes, 
and  guidance  of  the  forces  utilized  are  the 
three  principal  functions  of  intelligence  in  pro- 
duction. A  modification  of  the  economic  en- 
vironment suddenly  leaves  too  much  capital 
in  one  branch  of  industry,  and  leaves  unused 
opportunity  for  profitable  investment  in  another. 
It  is  the  function  of  intelHgence  to  discover 
these  facts  and  to  cause  a  transfer  of  capital 
and  productive  power  to  the  new  channels. 
Intelligence  finds  new  forms  of  potential  en- 
ergy in  nature,  discovers  methods  by  which 
waste  may  be  reduced,  discovers  new  sources 
of  raw  materials  and  new  markets  for  prod- 
ucts. Industries  which  were  in  favorable  po- 
sition in  every  respect  for  successful  compe- 
tition, have  at  times  failed  entirely  because 
of  their  inability  to  dispose  economically  and 
promptly  of  the  commodities  produced.  This 
fact  would  be  considered  only  in  the  study  of 
the  distribution  of  wealth,  except  for  the  loss 
entailed  on  society  by  this  waste  of  productive 
power.  An  added  degree  of  intelligence,  ap- 
plied   at   the   right    place,  would  complete   the 


THE  ORGANIZATION   OF  INDUSTRY         289 

group  of  agencies  operating  in  these  industries 
and  render  the  entire  group  effective. 

The  activity  of  intelligence  always  takes  the 
form  of  rendering  a  decision,  as  that  of  labor 
takes  the  form  of  producing  motion.  But  just 
as  the  efficiency  of  labor  depends  on  many 
circumstances  affecting  the  bodily  condition 
of  the  laborer,  so  the  soundness  of  the  judg- 
ment rendered  depends  on  the  physical  con- 
dition of  the  person  who  renders  it.  The  part 
which  intelligence  plays  in  production  assumes 
greater  importance  as  the  ideals  of  society  be- 
come higher  and  more  complex ;  as  the  stabil- 
ity of  credit,  the  appreciation  of  future  welfare, 
the  influence  of  moral  and  religious  motives, 
become  more  firmly  established.  These  con- 
ditions, favorable  to  a  higher  grade  of  intelli- 
gence, are  as  capable  of  cultivation  as  are  the 
conditions  favorable  to  efficient  labor.  It  is 
possible  for  society  to  produce  men  physically 
capable  of  energetic  and  efficient  labor;  so, 
also,  it  is  possible  to  produce  men  capable  of 
organizing  and  directing  their  own  industry. 
Those  who  place  themselves  in  opposition  to 
liberal  public  provision  for  general  higher  edu- 
u 


290  ECONOMICS 

cation,  and  for  such  elementary  and  secondary- 
instruction  as  shall  lead  up  to  it  by  an  easily 
trod  path,  are  favoring  a  monopoly  of  the  most 
important  productive  agency  in  the  hands  of 
the  few  whose  private  funds  can  supply  the 
necessary  intellectual  training.  There  is  no 
necessity  for  such  a  monopoly.  The  capitalists 
and  the  class  endowed  with  superior  intelligence 
have  been  identified  in  economic  theories  be- 
cause, as  a  matter  of  fact,  the  State  has  usually 
provided  in  so  niggardly  a  manner  for  general 
education  of  even  an  elementary  character  that 
none  others  than  the  children  of  wealthy  capi- 
talists could  be  placed  in  a  favorable  position 
for  the  development  of  their  intellectual  powers. 
Even  to  this  day  in  England,  where  the  older 
political  economy  arose,  although  there  are 
excellent  elementary  schools,  and  though  a 
university  education  is  comparatively  inexpen- 
sive, there  are  no  regular  means  provided  to 
prepare  even  the  brightest  student  of  the  ele- 
mentary school  for  university  study.^ 

1  An  important  educational  problem  in  England  is  the  re- 
organization of  secondary  instruction  in  such  a  way  as  to  bridge 
over  this  period.     A  Royal  Commission  issued  in  1895  *  com- 


THE  ORGANIZATION  OF   INDUSTRY         29 1 

We  need  a  more  aggressive  State  policy,  not 
merely  in  elementary  education,  but  in  uni- 
versity teaching  as  well.  The  systematic 
extension  of  university  teaching  to  every  com- 
munity, by  means  of  public  funds,  is  the  only 
completely  justifiable  policy  of  higher  education 
for  the  State  to  adopt.  This  would  not  secure 
intellectual  equality  for  its  citizens,  but  it  would 
practically  insure  that  all  the  widely  varying 
abilities  of  the  communities  should  be  brought 
to  light,  that  fewer  of  the  intellectual  powers 
of  society  should  be  wasted,  that  intelligence 
in  production  should  be  contributed  by  hun- 
dreds, where  it  is  now  contributed  by  scores. 
Intelligence  is  developed  under  a  system  of  in- 
equality of  opportunity  by  the  unsatisfactory 
method  of  placing  monopoly  gains  in  the  hands 
of  a  small  class,  thus  bringing  opportunities 
of  culture  to  its  members.  It  would  be  devel- 
oped more  naturally  and  completely  under  a 
democratic  system,  which,  by  taxation  of  mo- 
nopoly  gains,  by   reduction    of   waste,  and,  if 

prehensive  report  on  the  subject.  In  America  the  better  class 
of  High  Schools  connect  the  elementary  school  directly  with 
the  State  Universities. 


292  ECONOMICS 

necessary,  by  a  voluntary  sacrifice  of  present 
comfort  on  the  part  of  all  citizens,  would  pro- 
vide means  for  placing  adequate  educational 
facilities  within  the  reach  of  every  citizen. 

We  have  now  completed  our  brief  survey 
of  the  individual  productive  agencies ;  we  have 
seen  that,  strictly  speaking,  the  only  agencies 
are  the  physical  forces  which  produce  motion, 
and  the  motives  which  influence  man's  will, 
leading  him  to  cause  certain  motions  to  be 
made  rather  than  others ;  yet  under  the  license 
of  figurative  language  we  may  classify  those 
agencies  as  land,  capital,  labor,  and  intelli- 
gence :  land^  since  there  is  no  getting  access 
to  natural  forces  except  through  land  owner- 
ship or  rental ;  capital^  since  the  ownership 
of  future  goods  is  essential  to  the  present 
producer ;  labor^  since  human  labor  supplies 
whatever  physical  force  it  is  impossible  or 
impracticable  to  secure  from  land  and  the 
agencies  controlled  by  its  owners ;  intelligence, 
the  most  convenient  collective  term  for  the 
human  faculties,  active  in  production  and  de- 
termining its  amount  and  character. 

In   actual    industry   we   see    these   agencies 


THE  ORGANIZATION  OF   INDUSTRY         293 

only  in  combination.  We  see  also  different 
persons  combining  their  efforts  as  producers. 
It  is  easier  to  classify  the  persons  than  to 
classify  the  agencies.  A  rough  classification 
of  producers  as  capitalists  and  laborers  early 
becomes  popular  and  is  retained  in  ordinary 
use.  After  other  qualities  than  those  neces- 
sary for  the  accumulation  of  capital  and  for 
the  application  of  physical  strength  to  mate- 
rials become  prominent,  this  classification  be- 
comes inaccurate  and  misleading.  Attempts 
to  rectify  it  by  differentiating  the  landlord 
and  then  the  entrepreneur,  or  manager  of  in- 
dustry, from  the  capitalist  class  afford  only  a 
partial  remedy,  for  to  an  increasing  extent 
individual  producers  unite  in  themselves  the 
control  of  two  or  more  agencies,  and  especially 
those  who  furnish  labor  are  seen  to  be  capa- 
ble of  furnishing  also  the  capital,  the  intelli- 
gence, and  such  control  of  natural  forces  as 
the  industry  in  which  they  are  engaged  may 
require.  We  are  compelled  finally  to  abandon 
the  attempt  to  analyze  production  by  classify- 
ing producers  as  persons,  and  to  resort  to  a 
study  of  the  efficient  agencies  without    regard 


294  ECONOMICS 

to  the  arrangements,  whether  legal  or  physi- 
cal, which  place  the  control  of  those  agencies 
in  one  place  rather  than  another. 

The  organization  of  industry  begins  with 
the  earliest  forms  of  industry.  As  new  feat- 
ures develop,  they  appear  within  the  organiza- 
tion. There  is  no  industry  except  organized 
industry.  But  the  organization  becomes  more 
complex  as  society  develops  new  wants  and 
increases  its  productive  power.  |  The  most 
prominent  features  of  this  more  complex  or- 
ganization are  :  first,  an  extension  of  the  divi- 
sion of  labor ;  second,  an  increased  localization 
of  industry  or  territorial  division  of  labor ; 
third,  a  tendency  to  production  on  a  larger 
scale,  and,  fourth,  the  development  of  special- 
ized machinery  and  skill. 

Organization  is  possible  without  very  exten- 
sive division  of  labor  or  differentiation.  Pro- 
ducers may  merely  combine  their  powers  to 
accomplish  results  which  would  be  impossi- 
ble without  combination.  But  when  the  stage 
is  reached  in  which  a  person  confines  himself 
to  one  occupation,  instead  of  attempting  to 
supply   his    wants    largely    by    his    own   direct 


THE  ORGANIZATION  OF  INDUSTRY         295 

efforts,  new  methods  of  increasing  productive 
power  become  possible.  Much  practice  makes 
possible  a  high  degree  of  dexterity.  The  ex- 
perienced proof-reader,  for  instance,  detects 
the  smallest  error,  even  the  slight  imperfec- 
tion in  a  letter  which  the  ordinary  reader  would 
overlook.  With  many  repetitions  the  most 
difficult  manual  operation  becomes  easy,  and 
if  the  workman  cares  to  improve  his  skill, 
becomes  more  nearly  perfect.  Invention  and 
discovery  are  encouraged  by  the  subdivision 
of  labor,  and  what  is  more  important  the  in- 
ventions are  more  likely  to  be  made  by  those 
engaged  in  the  industries.  In  this  way  the 
possibility  of  a  reward  for  invention  becomes 
an  inducement  to  more  painstaking  work.  The 
division  of  labor  further  allows  a  better  utiliza- 
tion of  all  grades  of  labor,  giving  to  each  so 
far  as  a  proper  division  extends,  as  nearly  as 
possible,  the  exact  duties  for  which  his  strength 
and  abilities  thus  qualify  him. 

The  localization  of  industry  brings  somewhat 
similar  advantages.  In  some  cases  particular 
communities  have  developed  the  industries 
which  they  have  established  and  fostered  to  a 


296  ECONOMICS 

higher  degree  than  would  have  been  possible 
elsewhere,  and  the  total  wealth  product  of  the 
world  is  doubtless  increased*  by  such  territorial 
subdivision.  The  causes  by  which  the  localiza- 
tion has  been  brought  about  are  partly  physical 
and  partly  the  deliberate  results  of  man's  choice. 
**The  iron  industries  of  England  first  sought 
those  districts  in  which  charcoal  was  plentiful, 
and  afterwards  they  went  to  the  neighborhood 
of  collieries  .  .  .  The  Sheffield  cutlery  trade  is 
due  chiefly  to  the  excellent  grit  of  which  its 
grindstones  are  made."^  The  beet  sugar  in 
Germany,  however,  and  the  potteries  of  Tren- 
ton, N  J.,  owe  their  existence  to  different  causes. 
A  slight  disadvantage  in  physical  conditions  is 
more  than  compensated  by  the  superior  man- 
agement and  the  more  intelligent  labor  of  those 
engaged  in  the  industries. 

Combination  and  subdivision  of  labor  do  not 
exhaust  the  possibilities  of  organization.     Both 

1  Marshall,  Principles  of  Economics,  Bk.  IV.,  Chapter  X. 
Marshall  suggests  as  other  causes  the  patronage  of  a  court; 
and  among  the  modern  influences  tending  to  favor  the  localized 
industries  he  mentions  the  cheapening  of  the  means  of  commu- 
nication, the  establishment  of  subsidiary  industries,  etc. 


THE  ORGANIZATION  OF  INDUSTRY         297 

for  the  individual  and  for  communities  there  are 
limits  to  profitable  subdivision.  The  principle 
of  diversification  of  industry  is  the  last  to  be 
consciously  adopted,  but  it  has  its  own  obvious 
advantages,  which  have  been  too  frequently 
sacrificed  from  failure  to  consider  all  features 
of  the  industrial  situation. 

By  the  organization  of  industry  is  meant  not 
merely  the  separation  of  producers  into  trades, 
and  into  minute  portions  of  trades,  but,  further, 
the  bringing  together  of  the  various  productive 
agencies  in  such  a  way  that  they  become  really 
operative  and  efficient.-  It  is  the  name  applied 
to  a  series  of  positive  actions.  A  farmer,  by 
years  of  saving,  succeeds  in  getting  control  of 
a  certain  amount  of  capital,  or  he  borrows  from 
some  one  who  has  saved  it,  the  capital  he  needs  ; 
he  selects  a  farm  suitable  to  the  crop  which  he 
expects  to  raise  and  within  reach  of  his  market, 
he  employs  the  necessary  laborers,  he  purchases 
the  necessary  implements,  he  chooses  the  seed 
that  is  to  be  planted,  he  directs  how  much  labor 
shall  be  put  on  each  field,  how  many  times  the 
corn  shall  be  ploughed,  what  fences  shall  be 
built,  when  the  crop  shall  be  harvested,  where  it 


298  ECONOMICS 

shall  be  offered  for  sale,  in  a  word,  he  organizes 
industry.  With  the  extension  of  the  division  of 
employments  the  organization  becomes  more 
complex,  but  the  division  and  the  organization 
are  not  identical.  The  organization  may  be  very 
highly  developed  in  industries  which,  from  their 
nature,  do  not  allow  a  minute  division  of  labor, 
and  the  organization  may  be  very  weak  at  cer- 
tain points,  though  a  thorough  division  of  labor 
has  been  introduced.  Those  improvements  in 
the  organization  of  industry  which  prevent  mis- 
applications of  capital  or  energy  materially 
reduce  the  costs  of  production.  As  the  organi- 
zation of  industry  becomes  more  intricate,  it  be- 
comes at  times  more  sensitive,  and  a  reduction 
of  costs  may  often  be  secured  by  such  changes  in 
the  forms  of  organization  as  shall  secure  more 
perfect  insurance  against  loss. 

The  survey  of  the  organization  of  industry 
should  lead  to  a  clear  conception  of  the  source 
of  the  productive  power  of  society.  Modifying 
the  phraseology  of  Mill  ^  to  bring  it  more  nearly 
into  conformity  with  the  terms  employed  in  the 
preceding  discussion,  and  reversing  the  order  of 

1  Principles,  Bk.  I.,  Chapter  VII. 


THE  ORGANIZATION   OF  INDUSTRY         299 

enumeration  that  the  sources  may  appear  in  the 
order  of  their  importance,  we  may  conclude  that 
the  productive  power  of  society  will  be  great 
when  there  exist :  (a)  active  cooperation  of 
society,  especially  of  the  State,  and  consequent 
judicious  direction  of  the  social  forces;  (d)  con- 
ditions favorable  to  a  high  degree  of  energy, 
enterprise,  and  moral  trustworthiness;  (c)  serial 
methods  of  production  —  the  outward  indication 
of  which  is  the  presence  of  relatively  large 
quantities  of  future  goods ;  (d)  possession  of 
abundant  material  resources. 


CHAPTER   XIV 

PROPOSITIONS    CONCERNING   INDUSTRY 

The  productivity  of  land  depends  on  the  variety 
of  human  wants.  We  have  seen  that  the  in- 
crease of  land  demands  increased  knowledge 
concerning  its  productive  possibilities,  rather 
than  increased  area.  Every  new  item  of  know- 
ledge brought  to  light  by  practical  cultivators 
or  by  experiment  stations  is  the  equivalent  of 
added  acres.  A  change  in  the  methods  of  cul- 
tivation, which  permits  two  crops  in  the  year 
where  there  had  been  but  one,  is  equivalent  to 
the  doubling  of  the  land  area.  It  does  not 
follow  that  the  total  product  will  be  doubled. 
This  depends  upon  the  remaining  limitation,  as 
of  capital  or  labor.  But  the  contribution  to  the 
product  from  land  will  be  doubled. 

Another  condition  of  the  productivity  of  land 
lies  in  the  variety  of  wants.  Just  as  the  divi- 
sion of  labor  is  limited  by  the  extent  of  the 
market,  so  the  productivity  of  land  is  limited  by 
300 


PROPOSITIONS  CONCERNING  INDUSTRY       30I 

the  variety  of  products  desired.  The  positive 
statement  of  this  truth  is  that  every  increase  in 
the  variety  of  wants  puts  some  land  to  a  better 
use  and  so  adds  to  its  productivity.  Oftentimes 
the  increased  variety  in  consumption,  which 
thus  favorably  influences  industry,  springs  not 
from  the  discovery  of  some  commodity  hereto- 
fore unknown,  but  from  the  removal  of  some 
prejudice  which  has  prevented  the  general  use 
of  a  familiar  commodity.  Fantastic  or  fashion- 
able whims  have  often  foolishly  retarded  the 
full  development  of  agriculture  by  demanding 
products  which  can  be  produced  at  home  only 
with  great  difficulty ;  or  by  demanding  foreign 
products  which  can  be  procured  only  by  ruinous 
exploitation  of  home  resources  in  the  produc- 
tion of  one  or  two  commodities  for  which  an 
export  market  has  been  found.  The  proposi- 
tion, however,  does  not  refer  to  a  diversity  of 
wants  within  the  country  merely.  The  diversi- 
fication may  come  equally  from  new  foreign 
demands.  Whatever  enables  a  community  to 
put  its  land  to  better  use  by  cultivating  crops 
for  which  its  peculiar  properties  are  more 
exactly  suited,  is  of  economic  advantage. 


302  ECONOMICS 

The  soil  is  a  result  of  gradual  accumulation, 
and  must  be  renewed  either  by  natural  or  by  arti- 
ficial means.  The  soil  is  to  be  looked  upon  as 
a  fund  of  productive  qualities  capable  of  exhaus- 
tion. In  some  favored  localities  nature  contin- 
ually renews  the  fertility  of  the  soil  by  carrying 
new  elements  to  replace  those  withdrawn  as 
plant  food.  Fine  silt  and  organic  matter  are 
brought  on  the  wind,  or  by  inundating  rivers  in 
even  greater  quantities  than  are  used  up,  so  that 
soil  increases  each  year  in  depth  and  fertility. 
Fields  which  can  be  plentifully  supplied  with 
manures  may  be  similarly  enriched  by  the 
agency  of  man  while  yielding  annual  crops.  In 
general,  after  lands  have  been  cultivated  for  a 
longer  or  shorter  period,  depending  upon  the 
degree  of  their  original  fertility,  it  will  be  neces- 
sary to  supply  those  elements  which  either  were 
originally  scarce  or  have  become  so  by  cultiva- 
tion. Western  prairie  lands  have  in  some  in- 
stances yielded  a  single  annual  crop  for  thirty 
years  or  more  in  succession,  but  this  soon  be- 
comes a  wasteful  exploiting  of  nature's  accumu- 
lations, and  a  limit  is  finally  reached  when  the 
land  must  be  put  to  other  uses  or  allowed  to  lie 


PROPOSITIONS  CONCERNING  INDUSTRY      303 

fallow.  An  intelligently  selected  rotation  of 
crops,  with  a  timely  supply  of  the  particular 
elements  of  soil  that  are  found  to  be  lacking,^ 
will  keep  the  land  in  good  working  order  indefi- 
nitely. It  thus  tends  to  become  more  like  a 
factory  in  which  materials  are  supplied  and 
handled  in  strict  accordance  with  the  results 
expected,  and  less  a  mere  game  of  hazard  played 
out  by  the  chances  of  the  distribution  of  plant 
food. 

Cultivation,  the  shifting  of  population,  the 
cheapening  of  transportation,  and  other  social 
changes  tend  to  equalize  the  productivity  of  differ- 
ent areas.  Primitive  society  finds  greater  differ- 
ences in  the  productivity  of  the  different  parts 
of  the  land  at  its  disposal  than  a  society  in 
which  there  is  a  well-developed  consumption 
and  diversified  industry  of  the  kind  that  we 
have  come  to  regard  as  normal.  The  decrease 
of  rent  gradually  effected  in  the  course  of  ordi- 
nary cultivation  through  the  improvement  of 
poorer  soils  is  first  noticeable.  The  cheapening 
of  transportation  and  the  spread  of  population 
to  new  areas  has  a  profound  effect  in  the  same 
1  See  p.  39. 


304  ECONOMICS 

direction.  Lands  which  were  little  valued  be- 
cause of  their  remoteness  from  centres  of  popu- 
lation, become  of  great  value  as  population 
spreads  from  its  centres,  or  new  centres  are 
established.  The  opening  of  canals  and  of  other 
waterways,  the  building  of  railways,  and  the 
improvement  of  country  roads  break  down  the 
advantages  possessed  by  the  lands  immediately 
about  the  markets,  and  add  to  the  resources  of 
the  community  by  rendering  all  good  lands  more 
readily  available.  The  chief  original  distinction 
between  good  and  indifferent  lands  is  based  not 
always  on  any  real  differences  in  their  capacity 
to  yield  useful  products,  but  often  rather  on 
differences  in  their  location,  their  accessibility, 
and  their  capacity  to  produce  those  few  commod- 
ities that  are  originally  most  in  demand.  These 
latter  differences  are  of  the  kind  that  disappear 
rapidly  when  population  increases,  transporta- 
tion facilities  are  introduced,  and  wants  are  di- 
versified. The  general  effect  of  such  progress 
is  therefore  to  equalize  the  productivity  of  differ- 
ent areas.  In  other  words,  the  productive  power 
of  land  depends  chiefly  on  the  character  of  its 
population. 


PROPOSITIONS  CONCERNING  INDUSTRY       305 

A  large  part  of  the  expenses  of  agricultural 
production  are  due  to  the  initial  obstacles. 
There  are  certain  permanent  expenses  of  pro- 
duction in  agriculture  as  in  other  branches  of 
industry.  But  in  a  progressive  community 
there  are  others  of  a  temporary  character  made 
necessary  by  the  obstacles,  some  of  which  were 
referred  to  in  a  preceding  paragraph.  It  is  for 
this  reason  that  the  price  of  food  is  relatively 
higher  in  a  new  and  progressive  country.  Ex- 
tensive methods  of  cultivation,  using  up  reck- 
lessly the  productive  qualities  of  the  soil,  may 
for  a  time  conceal  the  real  conditions,  but  as 
soon  as  there  is  any  feeling  of  responsibility 
for  the  maintenance  of  the  soil  on  the  part  of 
those  who  are  already  in  possession  of  desirable 
lands,  and  a  determination  on  the  part  of  others 
to  bring  new  lands  into  cultivation,  or  to  bring 
them  within  effective  reach  of  the  market,  the 
special  expenses  connected  with  the  overcoming 
of  obstacles  shows  itself.  The  prices  of  prod- 
ucts must  rise  high  enough  to  cover  not  only 
the  ordinary  expenses  of  production,  but  to  re- 
imburse producers  for  the  extraordinary  ex- 
penses  caused  by  these  obstacles.     A   strong 


306  ECONOMICS 

argument  for  collectivist  action  has  been  drawn 
from  these  facts.  If  society  as  a  whole  will  re- 
move the  initial  obstacles,  and  open  new  areas 
to  cultivation  where  it  can  be  done  by  digging, 
irrigating  canals,  draining  marshes,  etc.,  the 
yield  of  agricultural  products  may  be  vastly 
increased  without  the  rise  in  prices  and  rents 
made  necessary  by  the  ordinary  method.  If 
the  whole  matter  be  left  to  individual  initia- 
tive, the  prices  of  food  and  other  products  must 
rise  to  a  point  sufficient  to  cover  the  expense  of 
both  ordinary  production  and  initial  enterprise, 
and  that  not  merely  on  the  new  products,  but 
on  all  others,  however  cheaply  produced,  on  the 
lands  already  cultivated. 

The  greatest  return  from  the  land  of  the  nation 
will  not  be  secured  when  it  is  all  imder  cultiva- 
tion. That  there  may  be  a  conflict  of  interests 
between  society  and  certain  of  its  members  is 
shown  nowhere  more  clearly  than  in  the  treat- 
ment of  forests.  One-fourth  of  the  land  of  a 
country,  in  the  opinion  of  an  eminent  author- 
ity, should  be  in  forests.  When  a  fourth  of 
it  has  been  taken  under  cultivation,  therefore, 
any  further  increase  of  product  should  be  sought. 


PROPOSITIONS  CONCERNING  INDUSTRY       307 

not  by  the  cultivation  of  more  land,  but  by  a 
more  intensive  culture  of  that  which  is  already 
under  plough.  Forests  are  sometimes  destroyed 
for  the  sake  of  the  timber,  but  loss  from  the 
cutting  down  of  forests  for  timber  is  insignifi- 
cant in  total  amount  when  compared  with  that 
resulting  from  ruinous  forest  fires,  the  result  of 
mere  carelessness  or  of  the  lack  of  spark  extin- 
guishers on  railway  locomotives.  Such  fires 
destroy  the  young  shoots  and  sometimes  entirely 
kill  out  many  of  the  best  varieties  of  trees. 
Scientific  forestry  yields  in  the  long  run  a  far 
greater  supply  of  timber  than  a  reckless  system 
of  extermination,  and  there  is  the  great  argument 
in  its  favor,  that  it  admits  a  selection  for  forests 
of  those  lands  that  are  unsuited  to  ordinary  cul- 
tivation. The  sources  of  streams,  and,  to  some 
extent,  their  entire  courses,  including  the  smaller 
tributaries,  should  be  protected  by  forests.  If 
deprived  of  their  natural  protection,  they  dry  up 
quickly  in  hot  weather,  and  rains  have  no  other 
effect  than  to  cause  sudden  and  severe  inun- 
dations rushing  immediately  to  the  sea.  The 
total  quantity  of  rainfall  is  diminished.  To  the 
forest  lands  gained  in  this  way,  the  mountains 


308  ECONOMICS 

and  hillsides  which  are  too  steep  or  rocky  for 
cultivation,  and  a  considerable  part  of  the  ordi- 
nary arable  land,  must  be  added  to  secure  a 
proper  relation  of  forest  to  cultivated  land. 

Land  will  not  yield  its  greatest  return  when 
used  for  a  single  crop.  Every  crop  has  its  own 
particular  proportion  of  various  elements  of 
plant  food,  and  its  own  peculiar  physical  and 
chemical  effect  upon  the  land  on  which  it  is 
grown.  The  elements  upon  which  it  draws 
most  heavily,  or  of  which  there  is  at  the  outset 
the  most  scanty  supply,  will  become  exhausted 
long  before  other  elements  need  to  be  replaced, 
and  the  particular  physical  treatment  required 
for  the  crop,  such  as  ploughing,  harrowing,  or 
drilling,  repeated  many  times  without  variation, 
becomes  injurious.  When  a  field  is  thus  worn 
out,  it  may  be  put  to  a  totally  different  use, 
pasturing,  for  example,  or  the  elements  found 
to  be  lacking  may  be  artificially  restored.  The 
land,  however,  may  be  kept  to  its  full  produc- 
tivity, and  its  productivity  may  even  be  stead- 
ily increased  by  a  suitable  rotation  of  crops  re- 
quiring different  treatment  and  drawing  at  least 
partly  upon  different  elements  in  the  soil.     Just 


PROPOSITIONS  CONCERNING  INDUSTRY      309 

as  the  human  being  requires  a  smaller  quan- 
tity of  food  if  there  is  a  variety  of  food  ele- 
ments, so  land  will  yield  a  greater  agricultural 
product  if  there  is  a  judicious  variety  of  crops. 

Capital  is  a  result  of  serial  metJiods  of  produc- 
tion, is  valued  because  of  forethought,  and  is 
preserved  by  abstinence.  The  physical  basis  of 
capital  is  the  serial  method  in  which  industry  is 
carried  on.^  Many  persons  working  together, 
though  unconscious  of  any  partnership  in  their 
labors,  find  that  they  can  produce  more  efficiently 
by  separating  the  process  of  production  into 
many  parts,  some  directly,  others  more  remotely, 
connected  with  the  object.  Notice,  for  example, 
how  any  good  is  produced.  Certain  persons 
make  tools ;  others  make  the  tools  by  which 
these  tools  are  made  ;  others  cultivate  the  crops 
necessary  to  provide  food  for  all  who  work, 
whether  on  the  land  or  in  the  factory ;  others 
work  at  the  numerous  parts  of  the  long  series  of 
processes  required  to  clothe  the  workers ;  still 
others,  finally,  wearing  the  clothes  thus  produced, 
living  on  the  food  thus  provided,  using  the  tools 
furnished  by  the  workers  who  were  themselves 
1  See  p.  65. 


3IO  ECONOMICS 

provided  with  tools  made  by  others,  and  draw- 
ing in  countless  other  ways  upon  the  capital  of 
society,  are  able  to  put  the  finishing  touches 
on  the  particular  good  in  question.  Capital  is 
a  result  of  this  method  of  industry.  Value  is 
attached  to  these  intermediate  goods  because 
of  the  forethought  of  man  in  thus  taking  initial 
steps  a  longer  or  shorter  time  in  advance  of  the 
final  act  of  production.  Not  because  the  unfin- 
ished or  intermediate  good  can  satisfy  a  want, 
but  because  there  will  be  wants  in  the  future 
which  can  be  supplied  only  by  the  production  of 
these  goods  now,  does  it  become  worth  while 
to  produce  them.  As  the  future  wants  become 
more  vivid,  future  goods  rise  in  value  as  com- 
pared with  present  goods,  and  the  sacrifice 
involved  in  a  proper  distribution  of  labor  be- 
tween the  production  of  present  and  the  pro- 
duction of  future  goods  becomes  less.  At  the 
same  time  the  actual  advantage  which  comes  to 
society  through  the  possession  of  capital  goods 
becomes  greater.  Even  if  the  members  of 
society  should  eventually  place  as  high  an  esti- 
mate on  future  goods  as  on  present  goods,  so 
that  there  would  be  no  room  left  for  interest, 


PROPOSITIONS  CONCERNING  INDUSTRY      3 1 1 

there  would  still  be  a  physical  advantage  in  se- 
rial methods  of  production,  and  the  community 
which  followed  those  methods  to  the  fullest  ex- 
tent would  have  so  great  an  advantage  over 
their  rivals  that  there  would  be  little  danger  of 
their  falling  back  into  more  primitive  methods. 

It  is  essential  in  this  system  of  industry  that 
capital  goods  should  be  produced.  It  is  no  less 
essential  that  those  into  whose  hands  these 
goods  come  should  refrain  from  converting 
them  into  present  goods  and  thus  use  up  in 
personal  enjoyment  the  wealth  which  is  capa- 
ble of  aiding  in  industry  as  capital.  The  man 
who  is  in  possession  of  a  given  fund  may,  if  he 
so  desire,  spend  it  in  gratifying  his  immediate 
wants.  He  may  purchase  a  fine  residence,  build 
a  yacht,  or  squander  it  in  more  reckless  ways. 
He  may,  on  the  other  hand,  invest  the  fund  in 
some  industrial  enterprise,  putting  entirely  be- 
yond his  reach,  so  long  as  he  continues  the  in- 
vestment, the  enjoyment  which  he  might  have 
obtained  as  an  alternative.  If  his  investment 
is  successful,  he  obtains  a  share  in  its  product, 
and  this  he  may  exchange  regularly  for  such 
present  goods  as  it  will  purchase. 


312  ECONOMICS 

The  giving  up  of  the  satisfactions  which  might 
have  been  obtained  by  the  expenditure  of  the 
original  fund  is  called  abstinence,  and  the  share 
in  the  product  which  is  accepted  in  its  stead 
is  interest.  It  is  sometimes  said  that  interest  is 
obtained  as  a  reward  for  abstinence,  and  this  is 
true  from  the  individual  standpoint,  but  it  is  not 
a  complete  explanation  of  interest.  The  part 
which  capital  actually  plays  in  industry  and  the 
reason  why  value  is  attached  to  it  are  a  part  of 
that  explanation.  Capital  is  created  by  the 
adoption  of  serial  methods  of  production,  it  is 
valued  because  of  the  importance  which  society 
learns  to  attach  to  future  wants,  and  it  is  pre- 
served by  abstinence. 

The  increase  of  capital  does  not  involve  decrease 
of  present  goods.  This  proposition  may  seem  to 
be  in  contradiction  with  that  of  the  preceding 
paragraph,  but  it  is  really  a  direct  consequence 
of  it.  When  we  look  only  at  the  accumulation 
of  capital,  we  see  that  it  is  made  by  the  constant 
sacrifice  of  present  enjoyments.  This  process 
of  abstinence  or  saving  may  be  carried  so  far  as 
to  bring  great  personal  hardship.  Every  increase 
of  capital  does  involve  abstinence  from  present 


PROPOSITIONS  CONCERNING  INDUSTRY       313 

enjoyments,  and  so  a  decrease  in  the  number  of 
present  goods.  An  individual  may  spend  a  long 
lifetime  in  saving,  adding  the  annual  increase 
to  his  original  fund,  and  enjoying  present  goods 
no  further  than  to  supply  the  bare  necessities 
of  life.  But  the  true  effect  of  capital  is  seen 
only  when  we  look  at  the  industrial  organization 
as  a  whole.  When  the  serial  processes  are  car- 
ried to  completion,  they  do  result  in  a  larger 
product,  and  the  final  product  is  present  goods. 
The  individual  capitalist  may  add  to  his  fund 
each  year,  but  if  so  he  only  increases  the  final 
product,  and  if  he  merely  keep  his  fund  intact, 
it  is  still  contributing  to  the  industrial  output 
to  such  an  extent  that  there  will  ultimately  be 
more  present  goods  than  if  the  capital  had  not 
been  saved.  This  difference  between  the  amount 
of  the  product  before  and  after  an  introduction 
of  additional  capital  has  no  direct  relation  to  in- 
terest or  the  share  of  the  capitalist.  That  share 
is  governed  by  the  demand  for  and  supply  of 
capital ;  by  the  ratio  between  the  need  for  sav- 
ing and  the  amount  of  saving  which  members 
of  society  are  ready  to  make ;  or,  in  still  other 
words,  by  the  ratio  between  the  estimate  of  pres- 


314  ECONOMICS 

ent  and  that  of  future  wants.  It  is  possible  to 
knit  stockings  by  hand  with  only  so  much  capital 
as  is  represented  by  a  set  of  knitting  needles. 
When  the  industry  is  transferred  to  a  factory, 
and  an  extensive  capital  is  invested,  the  relative 
part  played  by  capital  is  enormously  increased. 
We  might  safely  conclude  that  nine-tenths  of 
the  product  is  now  due  to  the  employment  of 
capital  in  the  industry.  But  the  capitalist  may 
or  may  not  obtain  this  share  of  the  product. 
This  will  depend  upon  the  quantity  of  free 
capital  seeking  investment. 

Looking  at  the  entire  industrial  system,  it  is 
clear  that  every  increase  of  capital  judiciously 
invested  adds  to  the  total  product  of  industry 
and  so  to  the  number  of  present  goods.  The 
increase  of  capital  is  gradual,  and  therefore  the 
increase  of  present  goods  is  continuous.  The 
true  conception  of  the  capitalist  or  man  who 
saves  is  not  that  of  a  man  who  does  without 
things,  but  rather  that  of  the  inventive  work- 
man who  is  constantly  finding  better  methods, 
using  more  efficient  tools,  accomplishing  greater 
results  with  the  same  personal  cost,  so  that 
there  is  a  constant  surplus  fund  for  the  accu- 


PROPOSITIONS  CONCERNING  INDUSTRY      315 

mulation  of  capital.  The  whole  of  this  surplus, 
it  is  true,  might  be  spent  on  immediate  pleas- 
ures, and  in  that  sense  personal  abstinence  is 
necessary ;  but  we  should  make  a  serious  mis- 
take if  we  supposed  that  capital  is  saved  as  a 
rule  by  any  cutting  down  of  pleasures  pre- 
viously enjoyed,  and  that  in  any  given  com- 
munity those  who  save  are,  as  a  rule,  compelled 
to  deprive  themselves  of  pleasures  enjoyed  by 
the  thriftless. 

Although  capital  is  a  permanent  fund ^  yet  capi- 
tal goods  must  be  constantly  replaced.  One 
additional  fact  concerning  capital  requires 
statement.  It  is  partially  expressed  in  the 
third  of  Mill's  fundamental  propositions  on 
capital,  where  he  says  that  capital,  though  saved, 
is  consumed.  This  paradoxical  theorem  Mill 
regards  as  one  of  the  most  elementary  truths  of 
political  economy.  He  who  saves  must  spend 
as  freely  as  he  who  consumes,  but  he  purchases 
future  instead  of  present  goods.  He  builds  a 
factory  instead  of  a  yacht.  He  employs  labor- 
ers instead  of  servants.  He  studies  the  wants 
of  other  consumers  instead  of  his  own.  He 
makes  goods  instead  of  consuming  them.     He 


3l6  ECONOMICS 

does  use  up  materials  and  so  productively  con- 
sumes them,  but  only  that  an  augmented  value 
may  reappear  in  the  product.  Any  wealth 
which  lies  entirely  unemployed  is  for  that 
length  of  time  not  capital.  It  is  a  part  of  the 
idea  of  capital  that  it  should  be  continually 
active.  It  may  appear  inactive  at  intervals, 
because  some  industrial  processes  are  intermit- 
tent in  their  nature,  and  the  product  may  ripen 
but  slowly.  Except  by  miscalctdation,  no  cap- 
ital is  consumed  except  productively,  and  no 
capital  is  productively  consumed  except  in  such 
ways  as  result  in  an  increase  of  value.  The 
concrete  goods  are  completely  destroyed  or 
worn  out,  but  new  goods  of  greater  value  have 
taken  their  place.  The  capitalist  cannot  retain 
his  wealth  except  by  turning  it  over,  changing 
its  form,  substituting  new  goods  for  old.  As 
the  river  remains  while  the  water  of  which  it  is 
made  flows  on  and  is  ever  replaced,  as  the  body 
continues  its  existence  though  its  parts  are  con- 
tinually renewed,  as  the  State  remains  though 
citizens  are  born  and  die  and  are  succeeded  by 
others,  so  the  capital  fund  is  permanent  though 
capital  goods  must  be  constantly  replaced. 


PROPOSITIONS  CONCERNING  INDUSTRY       317 

The  efficiency  of  indttstry  depends  upon  an 
economy  of  skill.  The  great  object  of  the  divi- 
sion of  labor  is  to  put  each  person  at  the  task 
for  which  he  is  best  fitted.  The  strongest  in- 
dictment which  can  be  brought  against  the 
existing  social  order  is  that  it  does  not  invaria- 
bly secure  this  result.  It  is  possible  that  the 
same  objection  can  be  urged  with  equal  or 
greater  force  against  any  other  general  plan  for 
the  organization  of  society.  We  may  expect, 
however,  that  society  will  become  less  and  less 
indifferent  to  the  social  loss  from  this  source. 
The  aggregation  of  workers  in  factories  where 
differences  in  capacity  may  be  observed,  the 
gathering  of  merchants  in  markets  where  dif- 
ferences in  cornmercial  efficiency  are  exposed, 
and  the  improvements  in  transportation  which 
make  easier  comparison  of  industrial  qualities 
and  of  industrial  products  —  all  promote  the 
economy  of  skill.  But  the  chief  agency  in  se- 
curing it  is  the  modern  organization  of  indus- 
trial enterprises  on  a  large  scale  under  the 
control  of  captains  of  industry  whose  resources 
enable  them  to  scour  the  earth  in  search  of 
persons  best  fitted  for  each  part  of  their  work. 


3l8  ECONOMICS 

No  doubt  favoritism,  compassion,  and  chance 
still  play  a  certain  part  in  the  selection  of  men 
for  the  different  grades  of  work ;  but  real  effi- 
ciency is  more  and  more  the  determining  factor. 
An  efficient  mdicstrial  organization  demands 
that  it  be  controlled  by  its  most  efficient  members. 
The  truth  of  this  is  so  obvious  that  demonstra- 
tion is  unnecessary.     It  is  the  main  reliance  of 

•  those  who  defend  the  competitive  features  of 
the  present  system.  It  is  probable  that  the 
competition  does  secure  a  very  high  degree  of 
success  in  the  selection  of  the  best  organizers 
and  managers  of  industry.  But  perhaps  sufficient 
attention  has  not  been  given  to  the  features 
which  prevent  effective  competition.  Important 
municipal  franchises  are  sometimes  adminis- 
tered, not  by  those  who  can  make  the  best  use 
of  them,  but  by  those  who  are  ready  to  bargain 
for  them  on  corrupt  terms.  By  inheritance 
capital  passes  from  the  hands  of  those  who  have 
accumulated  and  have  probably  used  it  wisely, 
into  the  hands  of  less  worthy  descendants  or  rela- 

.  tives  who  squander  or  misuse  it.  The  surplus 
which  springs  from  the  growth  of  population,  the 
development  of  markets,  the  progress  of  society, 


PROPOSITIONS  CONCERNING  INDUSTRY      319 

passes  into  the  hands  of  those  who  have  made 
lucky  ventures  or  secured  property  rights  which 
grew  up  under  older  conditions  and  which 
should  be  modified  to  meet  the  social  changes. 
In  all  these  ways  beneficent  competition  is 
defeated  and  the  interests  of  society  suffer. 
Whether  by  the  present  competitive  processes, 
modified  by  such  positive  institutions  as  exist, 
or  by  a  system  of  more  complete  laissez-faircy 
or  by  a  system  of  State  socialism  in  which  posi- 
tive regulation  by  the  State  would  be  extended 
to  cover  the  whole  field  of  industry,  it  should  be 
the  aim  to  place  and  keep  in  control  of  the  in- 
dustrial mechanism  the  persons  who  can  manage 
it  best.  What  reward  should  be  given  for  such 
service  is  a  different  question. 

Scientific  discoverers  and  inventors  have  a 
place  in  the  industrial  oi'ganization.  The  work 
of  inventors  and  of  the  large  class  of  scientific 
experts  who  bring  to  light  new  information 
is  to  be  classed  with  that  of  other  active  mem- 
bers of  the  industrial  organization.  Geographi- 
cal explorers,  chemists,  geologists,  biologists,  no 
less  than  machinists,  electricians,  or  physicians, 
are  all  needed  in  the  performance  of  the  vast 


320  ECONOMICS 

task  given  to  the  human  race,  viz.,  the  conquest 
of  nature  for  the  more  complete  satisfaction  of 
all  human  wants.  It  is  not  essential  that  the 
inventor  should  be  conscious  of  making  any- 
direct  contribution  to  the  social  product.  His 
motive  may  be  the  mere  satisfying  of  intellect- 
ual curiosity.  Many  manual  laborers  feel  no 
concern  or  interest  in  the  completed  product, 
and  the  ordinary  motive  is  often  the  day's  wage. 
A  contribution  to  the  product  is,  nevertheless, 
made  by  his  labor,  and  there  is  no  discovery  of 
science  that  does  not  have  its  social  significance. 
The  diffiLsion  of  knozvledge  increases  the  pro- 
ductive pozver  of  society  by  tending  to  equalize 
industrial  opportunities.  Among  the  various 
causes  of  industrial  inefficiency  none  is  so  glar- 
ing as  inequality  in  the  opportunities  offered  to 
develop  latent  powers.  There  is  no  real  freedom 
of  competition  between  individuals,  one  of  whom 
has  been  put  in  possession  of  important  informa- 
tion which  is  withheld  from  the  other ;  or  one 
of  whom  has  had  opportunities  of  developing  his 
mental  and  physical  powers  which  have  been 
denied  the  other.  The  chances  of  securing  the 
best  work  from  all,  and  of  finding  the  right  men 


PROPOSITIONS  CONCERNING  INDUSTRY       32 1 

for  difficult  and  important  places,  vary  directly 
with  the  diffusion  of  knowledge.  Teachers  and 
those  engaged  in  disseminating  knowledge 
through  books,  newspapers,  lectures,  or  other 
means  are  indispensable  industrial  agents. 
Directly  and  indirectly  their  contribution  to  the 
social  product  is  very  great. 

Industrial  cooperation  is  possible  only  where 
producers  are  put  on  ajt  equal  footing  by  a  com- 
plete diffusion  of  knozvledge.  It  is  generally 
held  that  the  goal  of  industrial  progress  is  the 
securing  of  a  generous  product  by  the  labor  of 
those  who  are  able  to  supply  their  own  capital, 
materials,  and  directive  enterprise.  The  present 
division  of  society  into  classes  of  those  who 
save  and  those  who  pay  others  to  do  their 
saving  for  them,  into  classes  of  those  who  own 
land  and  those  who  pay  rental,  into  classes 
of  employers  and  employees,  is  thought  to  be 
only  a  stage  in  the  general  development  of 
industrial  qualities  in  all  classes.  There  must 
always  be  organization  of  some  sort,  and  some 
method  must  be  found  of  vesting  authority  in 
those  most  competent  to  exercise  it.  But  there 
is  no  reason  in  the  nature  of  the  case  why  land, 

Y 


322  ECONOMICS 

capital,  and  management  of  industry  should 
not  belong  ultimately  to  the  laborers.  There 
is  no  insuperable  obstacle  to  the  success  at 
present  of  any  industry  organized  on  that  basis 
except  the  unequal  diffusion  of  knowledge  and 
mental  training.  Any  group  of  persons  now 
has  the  perfect  legal  right  to  establish  such 
an  industry,  and  in  fact  there  are  some  such 
industries  in  successful  operation.  Industrial 
cooperation  cannot  become  the  rule  until  pro- 
ducers are  put  on  an  equal  footing  by  the 
complete  diffusion  of  knowledge  throughout 
society.  All  persons  will  not  show  equal 
capacity,  but  every  genius  will  have  an  oppor- 
tunity for  healthy  development  and  no  one 
will  be  denied  opportunity  for  full  mental 
growth  because  of  unfavorable  circumstances. 
We  shall  learn  to  exploit  to  the  full  our  na- 
tional intellectual  resources  as  we  now  attempt 
to  exploit  our  natural  resources.  ^ 

1  Professor  E.  J.  James,  Address  before  the  American  Insti- 
tute of  Education,  at  Bethlehem,  N.H.,  1891. 


CHAPTER   XV 

RESTATEMENT   OF    FAMILIAR    PRINCIPLES 

The  division  of  labor  increases  the  efficiency  of 
production.  The  first  great  treatise  on  political 
economy,  Adam  Smith's  Wealth  of  Nations^ 
opens  with  a  discussion  of  the  advantages  of 
the  division  of  labor  introduced  by  an  illustra- 
tion drawn  from  the  manufacture  of  pins.  He 
shows  that  in  a  small  pin  factory  employing 
only  ten  men,  where  the  subdivision  of  work 
was  therefore  not  carried  to  its  fullest  extent, 
there  were  turned  out  daily  some  48,000  pins, 
or  4800  for  each  workman.  Mr.  David  Wells 
brings  the  illustration  down  to  our  own  times  by 
citing  a  modern  pin  factory  in  which  three  men 
manufactured  daily  7,500,000  pins,  or  2,500,000 
for  each  workman.  It  would  probably  be  quite 
impossible  for  a  man  without  the  cooperation 
of  others  to  produce  even  a  single  pin.  Even 
in  occupations  which  have  not  been  so  much 
modified  by  the  introduction  of  machinery,  the 
323 


324  ECONOMICS 

same  effect  follows  the  subdivision  of  the 
work  into  distinct  branches,  each  workman  con- 
fining himself  to  one  of  these  branches.  This 
great  economy  arises  chiefly  from  three  sources. 
The  laborer  acquires  manual  dexterity  by  in- 
numerable repetitions  of  the  same  operation. 
Every  day  his  work  becomes  easier,  and  if 
there  is  sufficient  motive  to  prevent  a  corre- 
sponding lessening  of  exertion,  this  greater 
dexterity  is  accompanied  by  increased  product. 
If  an  occupation  is  of  a  kind  that  does  not 
permit  laborers  to  specialize  in  this  way,  but 
requires  each  person  who  follows  it  to  learn  a 
larger  number  of  different  kinds  of  work,  it  is 
not  likely  to  advance  so  rapidly  as  others  in 
which  the  specialization  takes  place.  Farming 
is  an  occupation  of  this  kind.  Men  cannot 
confine  themselves  to  sowing,  cultivating,  har- 
vesting, or  threshing,  because  these  come  at 
different  times  in  the  year.  Neither  can  a 
farmer  produce  corn  or  oats  or  live  stock  ex- 
clusively, because  land  requires  a  rotation  of 
crops,  and  it  is  more  advantageous  to  combine 
several  kinds  of  agricultural  products. 

Allied  to  this  advantage  of  increased  dexterity 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      325 

is  another.  Close  and  long  attention  to  a  single 
occupation  enables  the  workman  to  think  of  new 
methods  to  discover  improvements  in  machinery, 
and  even  to  invent  new  tools  and  machines.  Not 
many  of  the  greater  inventions,  such  as  the  cot- 
ton-gin, the  steam  engine,  the  sewing-machine, 
or  the  electric  motor,  have  been  made  in  this 
way.  They  have  come  rather  from  the  patient 
investigations  of  a  class  of  specialists  whose 
energies  were  concentrated  on  working  out  an 
idea  conceived  while  watching  the  work  of 
others.  But  thousands  of  minor  inventions 
and  discoveries  have  been  made  by  workmen 
in  the  manner  indicated.  This  is  much  more 
likely  to  be  done  where  men  are  employed  in 
piece-work  than  if  they  are  paid  by  the  day  ;  but 
only  where  there  is  some  assurance  that  at  least 
for  a  time  the  workman  will  be  permitted  to 
enjoy  the  fruits  of  the  increased  production 
caused  by  his  discovery.  A  steel  manufacturer 
relates  to  the  writer  an  instance  in  which  the 
output  of  a  plant  was  doubled  in  a  period  of  ten 
years  without  any  increase  in  the  capital  or  in 
the  number  of  laborers,  by  the  introduction  of 
piece-work,  and  a  policy  of  liberal   encourage- 


326  ECONOMICS 

ment  to  workmen  for  such  improvements  as 
they  might  make. 

The  third  advantage  which  deserves  emphasis 
is  the  opportunity  given  by  the  division  of  labor 
to  secure  a  good  adjustment  between  the  work 
to  be  done  and  the  capacity  of  the  worker. 
Those  who  have  special  strength  or  special 
facility  in  any  particular  direction  may  gain 
the  greater  rewards  which  come  from  doing  a 
work  in  which  they  have  little  competition. 
Many  other  occupations  are  open  to  persons 
of  less  skill  or  strength  who  would  not  be  able 
to  make  their  living  at  all  where  the  subdivision 
of  labor  had  not  been  carried  so  far.  There  are 
other  important  advantages,  such  as  the  constant 
employment  of  tools  and  machinery,  the  saving 
of  time  necessary  to  pass  from  one  occupation 
to  another,  the  multiplicity  of  services  arising 
from  so  arranging  work  that  a  laborer  may  serve 
many  persons  as  easily  as  one,  as,  for  example, 
in  the  delivery  of  parcels  or  letters,  and  from  the 
multiplicity  of  copies,  as  in  the  printing  of  books 
or  of  calico. 

It  is  usually  held  by  economists  that  the  divi- 
sion of  labor  is  limited  by  the  extent  of  the  mar- 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      327 

ket,  and  this  is  the  case  wherever  the  market 
does  not  permit  the  further  limit  imposed  by 
the  physical  conditions  of  production  to  be 
reached.  In  many  branches  of  industry  the 
product  is  so  large  that  all  advantageous  sub- 
divisions are  already  made.  If  the  plant  is  ex- 
tended, it  is  simply  by  duplicating  processes 
already  in  use.  If  the  existing  organization  of 
the  pin  industry  permits  men  to  make  2,500,000 
pins  in  a  day,  it  is  probable  that  a  reduction 
of  the  demand  to  one-half  the  present  amount 
would  not  materially  change  the  method  of 
manufacture,  at  least  after  a  short  interval. 
But  a  point  would  eventually  be  reached  where  a 
lessening  of  the  demand  would  have  that  effect, 
and  would  induce  the  manufacturer  to  return  to 
more  primitive  methods. 

Freedom  of  trade  is  essential  to  a  good  indus- 
trial organizatiojz.  Political  economy  has  been 
for  a  century  and  a  quarter  a  weapon  in  the 
hands  of  those  who  have  labored  for  greater 
freedom  to  the  individual  and  to  industrial 
classes  to  make  such  exchanges  and  such  con- 
tracts as  seemed  to  them  advantageous.  It  has 
been  repeatedly  pointed  out  that  restrictive  laws, 


328  ECONOMICS 

and  laws  framed  in  the  interests  of  particular 
classes,  are  to  be  condemned,  not  solely  for 
their  injustice,  but  because  they  prevent  the  co- 
operation of  productive  agents  on  such  terms 
as  will  insure  the  largest  product.  There  is  no 
doubt  that  government  action  is  often  successful 
in  giving  higher  values  to  certain  commodities 
or  services,  and  in  depriving  other  commodities 
of  a  part  of  their  natural  market  value.  There 
is  no  doubt  that  governmental  supervision  often 
brings  an  ultimate  social  and  economic  gain. 
But  the  activity  which  is  demanded  in  one 
period  by  the  state  of  society  is  often  continued 
into  another  and  different  set  of  conditions, 
when  it  becomes  pernicious.  The  history 
of  legislation  in  enhghtened  countries  has 
been  largely  the  repeal  of  antiquated  restric- 
tions and  the  removal  of  burdens  that  have  be- 
come unjust  and  economically  disadvantageous. 
The  mere  repeal  of  a  bad  law,  or  the  enactment 
of  a  good  one,  is  often  insufficient.  What  is 
needed  is  that  there  shall  be  such  enlighten- 
ment of  public  opinion  that  the  freedom  decreed 
or  permitted  by  the  legislature  shall  be  in  fact 
enjoyed.      The  present  condition  of  the  labor 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      329 

organization  movement  in  some  of  the  cities  of 
America  is  a  case  in  point.  There  are  nowhere 
laws  making  such  organizations  illegal.  But 
there  are  many  industrial  establishments  which 
do  not  permit  their  employees  to  form  organiza- 
tions. It  might  be  difficult  to  secure  to  work- 
men the  freedom  in  this  respect  which  their 
interests  undoubtedly  require  without  intrench- 
ing upon  the  equal  freedom  of  employers  to  dis- 
charge such  of  their  employees  as  are  for  any 
reason  unsatisfactory.  It  might,  however,  be 
done  in  the  case  of  all  corporations  enjoying 
public  franchises,  as  a  condition  of  the  original 
granting  of  the  franchise.  The  economic  prin- 
ciple involved  is  that  the  social  product  is 
largest  and  of  the  greatest  social  utility,  other 
things  being  equal,  when  none  of  the  necessary 
factors  of  production  labor  under  undue  restraint, 
but  when  all  are  free  to  work  in  such  combina- 
tions as  seem  most  profitable. 

The  abolition  of  special  privileges  of  manu- 
facture, such  as  were  once  granted  by  royal  favor 
to  companies  or  individuals,  of  laws  forbidding 
the  exportation  of  certain  products  and  the 
importation  of  others,  and  of   the   usury  laws, 


330  ECONOMICS 

sufficiently  illustrate  the  radical  improvement 
secured  by  the  fuller  recognition  of  economic 
freedom.  General  regulations  prescribing  the 
conditions  on  which  trade  and  industry  may 
be  carried  on  do  not  necessarily  violate  the 
principle.  "  They  fix  the  plane  above  which 
competition  is  to  take  place,"  ^  and  apply  alike  to 
all.  They  interfere  unjustifiably  with  industry 
only  when  they  modify  the  distribution  of 
wealth  already  produced.  It  is  a  different  thing 
to  establish  a  permanent  social  barrier  at  a  cer- 
tain place  to  which  industry  adjusts  itself  as 
to  a  river  or  mountain  in  the  physical  environ- 
ment. The  abolition  of  sweat  shops,  for  exam- 
ple, works  no  hardship  so  soon  as  it  applies  to 
the  entire  competitive  field.  Even  saloon  keep- 
ers are  apt  to  favor  laws  requiring  saloons  to  be 
closed  on  Sundays  and  at  certain  hours  of  the 
night  as  soon  as  they  are  convinced  that  the 
requirement  is  to  be  universal. 

The  interests  of  society  are  promoted  by  each 
member  seeking  his  own  interest.  The  principle 
that  the  individual  by  seeking  his  own  economic 
interest,   by  engaging  in   whatever  occupation 

1  H.  C.  Adams,  The  Relation  of  the  State  to  Industry. 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      33  I 

and  pursuing  it  in  whatever  way  will  bring  to 
him  the  greatest  reward,  is  thereby  promoting 
the  general  interests  of  society,  has  sometimes 
been  transformed  into  the  doctrine  that  the  in- 
terests of  the  individual  and  of  society  are 
always  identical.  There  are  many  exceptions  to 
the  rule  that  the  interests  of  society  and  those 
of  individuals  coincide  ;  but  the  general  principle, 
that  the  individual  in  promoting  his  own  eco- 
nomic interest  does  thereby  serve  the  interests 
of  society,  underlies  our  whole  social  organiza- 
tion. Acceptance  of  this  principle  does  not  ex- 
clude the  consideration  of  other  forces  besides 
self-interest  for  the  promotion  of  the  interests 
of  society.  Reliance  may  be  in  part  upon  self- 
interest,  and  in  part  upon  civic,  religious,  or 
social  motives.  Any  of  these  may  come  into 
conflict  even  with  enlightened  self-interest,  and 
it  may  then  be  a  question  whether  the  act  which 
is  prompted  by  motives  of  self-interest  will 
bring  a  benefit  to  society  greater  or  less  than 
that  prompted  by  a  different  motive.  All  that 
can  rightly  be  claimed  for  the  economic  mo- 
tive of  self-interest  is  that  it  does  on  the  whole 
work  advantageously  to  society,  and  that  there 


332  ECONOMICS 

is  general  harmony  of  individual  interests  with 
those  of  society. 

The  benefits  of  improved  productiofi  tend  to 
diffuse  themselves  throughout  society.  No  im- 
provement, discovery,  invention,  or  increase  of 
wealth  materials  is  of  advantage  to  its  owner 
alone,  however  little  he  may  care  for  the  inter- 
ests of  others.  An  increase  of  capital  benefits 
first  the  capitalist  in  whose  hands  it  is  accumu- 
lated, but  by  the  very  fact  of  its  employment  in 
industry  other  factors  are  made  more  produc- 
tive, and  so  share  in  the  benefit.  An  important 
invention,  even  when  patented,  is  of  social  ad- 
vantage. It  diminishes  the  cost  of  production, 
or  utilizes  new  materials,  or  permits  the  employ- 
ment of  new  energy,  or  otherwise  reveals  hidden 
sources  of  wealth.  The  patent  cannot  possibly 
secure  all  of  the  advantage  to  the  inventor,  and 
it  generally  secures  but  a  very  small  part.  Books 
and  newspapers  and  schools  and  travel  increase 
the  rapidity  of  circulation  of  such  advances  in 
production,  but  without  these  aids  the  operation 
of  economic  law  would  insure  a  similar  result. 
When  a  laborer  rises  from  the  ranks  to  become 
an  employer  of  labor,  he  promotes  the  interests 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      333 

of  his  fellow-laborers  if  he  is  efficient  and  suc- 
cessful.^ When  laborers  add  to  their  product 
by  more  energetic  and  intelligent  effort,  they 
not  merely  increase  their  own  wages  (provided 
they  are  free  to  seek  their  own-  interest),  but 
they  also  confer  a  benefit  upon  consumers  — 
among  whom  other  laborers  form  the  chief  part 
—  and  permit  a  more  advantageous  investment 
of  the  capital  engaged  in  the  industry.  It  is 
through  changes  in  consumption  that  the  greater 
part  of  the  process  of  the  diffusion  of  benefits 
takes  place.2 

The  value  of  commodities  coincides  with  the 
expenses  of  their  production.  The  classical  doc- 
trine that  cost  of  production  regulates  the  value 
of  freely  produced  commodities  has  been  re- 
placed in  our  discussion  of  value  by  the  newer 
explanation  which  traces  value  to  marginal  utility. 
Cost  has  been  used  only  in  its  more  accurate 
sense  of  actual  expenditure  of  energy  or  loss 
of  vitality  occasioned  by  active  participation  in 
industry.  In  this  sense  it  is  evident  that  there 
is  no' constant  relation  between  cost  and  value, 

1  See  general  law  of  distribution  in  Ch.  XVII, ,  especially  p.  395. 

2  See  Chapter  VI.,  "  Propositions  concerning  Consumption." 


334  ECONOMICS 

and  it  is  also  clear  that  values  can  be  measured 
far  more  easily  than  costs,  and  that  they  can  be 
more  easily  compared  with  each  other.  In 
order  to  ascertain  the  cost  of  a  commodity,  it 
would  be  necessary  to  make  actual  inquiry  of  all 
persons,  capitalists,  or  laborers  who  have  con- 
tributed to  it  directly  or  indirectly  ;  to  ascertain 
whether  they  have  made  their  contribution  at 
any  personal  cost  to  themselves,  deducting  any 
other  benefits  that  resulted  from  the  same  ac- 
tivity. 

When  writers  have  attempted  to  establish  an 
equivalence  between  cost  and  value,  they  have 
not  taken  the  trouble  to  ascertain  actual  cost, 
and  so  they  have  not  really  used  it  at  all  in  the 
comparison.  They  have  ascertained  only  the 
value,  and  from  this  have  attempted  to  deduce 
the  cost.  What  is  possible,  however,  is  to  com- 
pare the  value  with  the  expenses  of  production 
to  an  individual  employer.  From  his  own  stand- 
point the  employer  looks  upon  all  the  contri- 
butions of  his  fellow-producers  as  so  many 
commodities  or  services  to  be  secured  on  as 
favorable  terms  as  possible,  and  the  sum  of  his 
investments  in  the   particular  commodity  must 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      335 

Stand  in  some  definite  relation  to  the  value  of 
the  commodity  at  the  time  when  he  places  it 
upon  the  market.  Self-interest  would  prevent 
any  producer  from  continuing  indefinitely  to 
produce  commodities  at  a  greater  expense 
than  is  warranted  by  their  value.  If,  on  the 
other  hand,  the  value  is  greatly  in  excess  of  the 
combined  expenses  of  production,  so  that  there 
are  unusual  profits  to  be  made  in  the  manufact- 
ure, an  increased  competition  of  others  will  be 
attracted,  resulting  in  so  great  a  production  that 
marginal  utility  will  be  reduced  by  the  increased 
supply.  If  it  is  practicable  to  secure  concerted 
action  among  the  entire  body  of  producers  of  a 
single  commodity,  so  that  competition  is  abol- 
ished, the  value  may  be  kept  considerably  above 
the  expense  of  production.  This  is  most  easily 
accomplished  in  the  case  of  commodities,  like 
coal  or  oil,  where  the  supply  is  regulated  not  so 
much  by  the  will  of  the  original  producers  as 
by  those  who  control  transportation  facilities. 
But  it  is  sometimes  accomplished  even  with 
commodities  which  would  ordinarily  be  classed 
among  those  "freely  produced."  There  is  al- 
ways  present  a  potential  competition,  but  the 


336  ECONOMICS 

initial  obstacles  in  the  way  of  making  it  effective 
allow  a  wide  margin  for  the  rise  of  values  above 
expenses.  A  railroad  which  taps  an  extensive 
coal-field  may  long  retain  control  because  of  the 
expense  of  building  a  new  road  and  the  difficulty 
of  securing  a  charter  and  right  of  way.  Profits 
may  be  much  higher  than  in  other  industries 
without  being  sufficiently  great  to  justify  the 
building  of  a  competitive  road. 

Many  other  exceptions  and  reservations  would 
be  necessary  to  the  validity  of  the  law  that  value 
coincides  with  expense  of  production,  if  in  the 
latter  term  we  included  all  the  original  invest- 
ments. But  in  real  life  any  unusual  gains  are 
rapidly  capitalized,  and  any  new  investor  finds 
them  added  to  his  expenses  as  well  as  to  the 
value  of  his  product.  The  railway  shares,  for 
example,  increase  in  value  to  correspond  with 
the  earning  power,  and  the  equivalence  of  expense 
and  value  is  thus  secured  by  increasing  the 
expenses  rather  than  by  reducing  value.  The 
general  rule  for  freely  produced  commodities  is 
that  value  tends  to  equal  the  sum  of  expendi- 
tures necessary  to  bring  a  product  finally  upon 
the  market,  including  in  the  estimate  of  expenses 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      337 

an  allowance  for  ordinary  profit  to  the  final  em- 
ployer or  dealer. 

There  can  be  but  one  price  for  a  given  commod- 
ity in  a  given  market.  By  the  market,  is  meant 
the  area  within  which  there  is  free  competition 
of  buyers  and  sellers,  and  within  which  the  con- 
ditions are  such  that  both  buyers  and  sellers 
may  readily  compare  prices.  Wholesale  and 
retail  prices  are  not  equal  because  the  wholesale 
market  is  distinct  from  the  retail  market,  even  in 
the  same  cities  and  towns.  Retail  buyers  are 
as  much  cut  off  from  the  wholesale  sellers  as  if 
they  were  in  a  different  country,  and  the  only 
ordinary  comparison  of  prices  is  among  retail 
dealers  who  add  to  the  wholesale  price,  repre- 
senting the  entire  expense  of  the  product  up  to 
that  point,  an  allowance  for  the  expenses  of  retail- 
ing, including  the  labor  of  subdividing  parcels, 
exposing  for  sale,  carrying  the  stock  until  sold, 
insurance,  and  profit.  This  calculation  is  made 
as  a  means  of  estimating  the  success  of  the  retail 
store,  rather  than  as  a  means  of  deciding  what 
the  retail  price  shall  be.  The  successful  mer- 
chant does  not  fix  his  prices  by  adding  a  fixed 
and  uniform  percentage  to  the  cost  of  his  goods. 


338  ECONOMICS 

He  does  not  hesitate  at  times  to  allow  their 
price  to  fall  below  cost,  if  it  is  clear  that  their 
marginal  utility  has  fallen  since  his  stock  was 
purchased  ;  and,  on  the  other  hand,  he  takes  ad- 
vantage of  favorable  conditions  to  sell  far  above 
the  cost  to  himself ;  or,  stating  this  in  the 
reverse  manner,  he  buys  freely  when  there  is  an 
opportunity  to  secure  a  stock  at  very  much  less 
than  the  goods  can  be  sold  for  at  retail. 

No  one  understands  better  than  the  retail 
dealer  that  values,  or  retail  prices,  are  to  be 
governed  by  marginal  utility  —  by  the  relation 
between  the  present  public  desire  and  the  supply 
offered.  He  will  make  a  very  small  profit  or 
none  at  all  on  certain  classes  of  goods  and  a 
very  high  profit  on  others.  In  each  case  it  is 
the  state  of  the  public  mind  that  is  the  deciding 
factor.  The  natural  price  is  as  definitely  fixed 
as  the  cost,  though  an  individual  dealer  may  for 
a  time  offer  his  goods  above  or  below  it.  Local 
variations  may  occur  for  special  reasons,  such  as 
the  popularity  of  particular  locations,  but  there 
is  a  general  tendency  toward  an  equality  of 
price  throughout  the  market,  whatever  the  com- 
modity and  whatever  its  cost. 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      339 

Industry  is  limited  by  capital.  This  is  the 
first  of  Mill's  four  famous  propositions.  Indus- 
try cannot  be  carried  on  until  the  materials  of 
industry  and  the  means  of  support  for  those  who 
are  to  engage  in  it  have  been  provided.  We 
live,  not  upon  the  proceeds  of  our  present  indus- 
trial activity,  but  upon  that  of  the  past.  Tools 
are  made,  buildings  erected,  roadways  con- 
structed, and  food  and  clothing  produced,  all  in 
response  to  immediate  demands  for  those  com- 
modities; but  buildings  and  roads  are  made 
of  such  permanent  materials  that  they  can  be 
utilized  in  future  production,  tools  are  made  to 
use  again  and  again,  food  and  clothing  are  pro- 
vided in  sufficient  quantity  to  support  and  clothe 
producers  in  every  branch  of  industry.  Indus- 
try cannot  be  carried  on  unless  there  is  capital 
to  be  devoted  to  these  preliminary  steps.  The 
amount  of  industry  is  fixed  by  the  quantity  of 
capital  available  and  actually  used,  not  merely 
by  the  quantity  available ;  for  though  industry 
is  limited  by  capital,  it  does  not  always  reach  the 
full  limit.  Capital  may  be  temporarily  unem- 
ployed, and  very  often  it  is  not  employed  in  the 
most  remunerative  manner. 


340  ECONOMICS 

The  chief  bearing  of  this  proposition  is  in 
the  development  of  another  —  that  a  demand 
for  corninodities  does  not  constitute  a  demand 
for  labor.  A  demand  for  particular  commodi- 
ties may  cause  industry  to  be  diverted  from  an 
old  channel  to  the  new^.  It  may  displace  certain 
laborers  by  others.  But  it  does  not  create  a 
demand  for  additional  labor  unless  it  provides 
the  necessary  capital  upon  which  the  new  labor 
depends  for  materials  and  support.  Since  indus- 
try is  limited  by  capital,  it  cannot  expand  to  meet 
the  new  demand  unless  additional  capital  is  fur- 
nished or  the  amount  needed  withdrawn  from 
other  enterprises. 

Fixed  and  circulating  capital  must  stand  in  a 
definite  relation  to  each  other.  Capital  is  a  col- 
lective term  for  all  those  products  of  industry 
which  are  used  in  farther  production.  Some  of 
them,  like  seed,  materials,  and  merchants'  stocks 
of  goods,  are  used  only  once,  after  which  they 
must  be  replaced  by  others  if  the  production  is 
to  continue.  Others,  like  tools  and  buildings, 
are  used  many  times,  or  continuously  for  long 
periods  before  they  need  to  be  replaced.  The 
first  class  constitute  the  circulating  capital,  the 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      34 1 

second  the  fixed  capital.  The  proportion  be- 
tween the  two  classes  is  governed  by  a  multitude 
of  conditions.  The  amount  to  be  paid  out  in 
wages,  for  example,  varies  greatly  in  different 
branches  of  industry,  because  of  the  longer  or 
shorter  time  which  must  elapse  between  the 
initial  steps  of  production  and  the  final  sale 
which  reimburses  the  capitalist  for  his  invest- 
ment. It  sometimes  happens  that  by  making 
extensive  permanent  improvements  it  becomes 
possible  to  turn  out  an  equal  product  with  much 
less  circulating  capital.  Less  capital  is  needed 
for  current  production  because  the  permanent 
features  of  the  industry  are  improved.  The 
increase  of  fixed  capital  at  the  expense  of  circu- 
lating capital  may  bring  serious  disturbance. 
The  gradual  increase  of  both  is  assured  with 
the  progress  of  society  through  the  introduc- 
tion of  serial  methods  of  production.  To  pre- 
serve a  judicious  balance  between  them  is 
essential  to  prosperity. 

Profits  tend  to  a  7ni7timum.  It  has  long  been 
held  that  profits,  including  in  that  term  the  en- 
tire remuneration  of  employers  and  capitalists, 
constantly  tend  to  diminish  because  of  the  in- 


342  ECONOMICS 

crease  of  capital  faster  than  the  opportunities 
for  its  remunerative  employment.  It  is  obvious 
that  neither  a  fall  nor  a  rise  in  the  rate  of  prof- 
its, if  we  include  two  such  diverse  elements  as 
interest  on  capital  and  the  returns  obtained  by 
employers  for  their  participation  in  industry, 
can  be  continuous.  The  ability  to  discover 
new  and  profitable  fields  for  investment  will 
show  itself  only  the  more  promptly  if  a  low  rate 
of  interest  renders  it  comparatively  easy  for  one 
who  has  organizing  ability,  but  no  capital  at  his 
disposal,  to  secure  the  amount  needed.  Profits 
in  the  narrower  sense  are  therefore  very  apt  for 
a  time,  at  least,  to  show  a  tendency  directly  the 
reverse  of  interest.  There  is  abundance  of  his- 
torical evidence  that  there  has  been  a  consid- 
erable fall  in  the  rate  of  interest,  limiting  the 
term  to  the  return  for  capital.  The  tendency 
is  checked  by  the  opening  of  new  fields  of  invest- 
ment, for  these  are  of  benefit,  not  merely  to  the 
organizer  of  industry  who  discovers  them,  but 
also  to  the  capitalist  whose  capital  thus  finds 
new  employment,  the  landowner  whose  mate- 
rials are  called  into  requisition,  and  the  laborers 
whose  cooperation  will  be  necessary  to  any  utili- 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      343 

zation  of  the  new  fields.  But  the  increase  in  the 
number  of  the  men  who  can  find  or  make  such 
opportunities,  especially  if  they  are  of  a  similar 
type,  tends  to  reduce  their  own  rewards  by  their 
competition  with  each  other.  Eventually  profits 
as  well  as  interest  will  tend  to  a  minimum,  though 
not  with  the  same  uniformity. 

Wages  vary  with  the  expense  of  subsistence. 
The  relation  between  wages  and  the  standard 
of  living  has  been  explained  in  another  chapter. 
Whatever  margin  we  recognize  between  the 
laborer's  income  and  the  bare  cost  of  subsist- 
ence, it  is  clear  that  there  is  such  relation 
between  them  that  total  wages  must  be  in- 
creased to  meet  any  general  and  permanent 
increase  in  the  expenses  of  the  necessaries  of 
life,  and  that  any  decrease  in  those  expenses 
will  permit  a  decrease  of  wages  without  either 
diminishing  population  or  setting  in  motion  the 
forces  which  produce  a  change  in  the  standard 
of  living.  Employers  of  labor  have  therefore 
correctly  regarded  a'  cheapening  of  food  and 
clothing  as  desirable  from  their  own  standpoint. 
Wages  are  to  them  merely  one  of  the  expenses 
of    production,    and    anything    which    reduces 


344  ECONOMICS 

house  rent  and  the  expenses  of  living  in  any 
other  respect  permits  a  corresponding  reduction 
of  wages.  Not  every  such  lowering  of  the  ex- 
penses of  living  is  followed  by  a  lowering  of  wages. 
But  any  conditions  which  enable  laborers  to 
maintain  high  wages,  under  such  circumstances, 
would  have  enabled  them  to  secure  an  increase 
if  the  expenses  of  subsistence  had  not  decreased. 
It  is  simply  evidence  that  there  was  a  favorable 
trend  in  their  direction  which  they  had  not 
realized.  And,  indeed,  the  greater  part  of  the 
very  great  increase  of  wages  during  the  past 
hundred  years  has  been  brought  about  in  pre- 
cisely this  manner.  It  is  much  easier  to  keep 
nominal  wages  at  a  given  point,  when  that  has 
come  to  mean  higher  real  wages,  than  to  in- 
crease at  the  same  time  real  and  nominal  wages. 
A  chief  factor  is  a  united  and  vigorous  senti- 
ment in  favor  of  a  definite  demand,  and  this  is 
more  easily  created  in  behalf  of  wages  which 
have  already  been  nominally  enjoyed.  Fort- 
unately the  cheapening '  of  commodities  has 
continually  expanded  the  purchasing  power  of 
both  money  and  labor. 

Population  tends  to  increase  faster  than  the 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      345 

means  of  subsistence.  The  doctrine  of  popula- 
tion, ably  propounded  and  defended  by  the 
English  economist  Malthus,  has  been  the  sub- 
ject of  much  controversy.  Its  statement  has 
usually  been  coupled  with  specific  remedies  for 
the  calamities  which  the  unchecked  tendency 
of  population  to  outrun  subsistence  would 
bring.  Both  these  remedies  and  the  doctrine 
itself  have  been  savagely  attacked,  but  it  cannot 
be  said  that  the  doctrine  has  been  overthrown. 
Where  there  is  a  full  sense  of  responsibility  for 
the  welfare  of  children  on  the  part  of  parents 
and  of  the  community,  so  that  marriages  do  not 
take  place  earlier  than  is  warranted,  and  the 
desire  to  provide  for  the  welfare  of  offspring 
furnishes  a  constant  spur  to  effective  industry, 
there  exists  what  Malthus  calls  the  preventive 
check  to  overpopulation.  Where  there  is  no 
such  feeling  of  responsibility,  nature  steps  in 
to  prevent  a  too  rapid  increase  by  such  positive 
checks  as  pestilence  and  famine.  Communities 
are  given  their  choice  of  positive  or  preventive 
checks.  The  preventive  checks  are  not  always 
or  usually  exercised  consciously.  Through  the 
development  of  the  family  and  of  capital,  social 


346  ECONOMICS 

instincts  are  created  which  hold  in  check  the 
tendency  in  population  to  increase  faster  than 
the  means  of  subsistence  and  so  to  press  hard 
upon  the  food  supply. 

The  application  of  labor  and  capital  to  land 
is  subject  to  the  law  of  diminishing  returns.  A 
certain  amount  of  work  can  be  expended  upon 
a  given  piece  of  land  with  a  maximum  return 
per  unit  of  labor  or  capital.  If  additional  work 
is  done  the  result  will  be  to  increase  the 
product  somewhat,  but  not  in  the  same  pro- 
portion to  the  increased  expenditure  of  en- 
ergy. If,  for  example,  ^looo  a  year  is  spent 
on  a  farm  with  a  result  that  5000  bushels 
of  corn  are  produced,  it  may  be  that  $1200  on 
the  same  farm  would  produce  6000  bushels,  in 
which  case  the  additional  ^200  has  brought  as 
good  a  return  as  the  original  $1000.  In  some 
instances,  where  the  land  has  not  been  culti- 
vated to  its  full  capacity,  it  might  even  bring  a 
larger  proportional  return.  But  it  is  obvious  that 
a  point  would  be  reached  after  which  this  would 
no  longer  be  true:  ^1400  spent  on  the  farm 
would  probably  yield  more  than  ;^I200,  but  not 
one-sixth  more,  or  7000  bushels,  as  it  should  if 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      347 

the  ratio  were  to  be  continued.  The  return 
may  be  put  at  6500.  This  ratio  would  rapidly 
diminish  as  additional  amounts  of  work  are 
applied.  Each  addition  would  add  something, 
but  not  so  much  as  previous  applications  had 
done.  It  is  this  fact  of  diminishing  returns  in 
agriculture  that  has  given  color  to  all  the  specu- 
lations of  the  English  school  of  political  econ- 
omy. It  has  been  regarded  as  the  corner-stone 
of  the  science.  Upon  it  have  been  built  the 
law  of  population,  of  wages,  of  profits,  of  rent, 
and  of  social  progress.  The  niggardliness  of 
nature  has  been  held  responsible  for  the  limita- 
tions experienced  in  the  increase  of  prosperity 
and  general  happiness.  Whether  the  law  is 
really  of  this  character  we  shall  inquire  more 
minutely  in  the  chapter  on  the  "  Obstacles  to 
Social  Progress." 

Rent  arises  from  differences  in  the  fertility  of 
soils.  When  soils  of  different  grades  of  fertility 
are  cultivated  for  the  same  market,  the  value  of 
the  crops  must  be  such  that  those  who  cultivate 
the  poorest  soils  are  as  well  rewarded  for  their 
labor  as  producers  of  equal  abilities  in  other 
branches  of  industry,  or,  putting  it  in  another 


348  ECONOMICS 

way,  capital  expended  in  the  cultivation  of  the 
inferior  soils  must  be  as  well  remunerated  as 
capital  in  general ;  otherwise  the  inferior  soils 
will  be  thrown  out  of  cultivation  and  the  dimin- 
ished supply  will  again  bring  prices  up  to  the 
point  where  they  can  be  cultivated  with  the 
ordinary  profit.  If,  however,  prices  are  high 
enough  to  enable  crops  to  be  produced  at  a 
profit  on  the  poorest  soils  in  cultivation,  every 
piece  of  land  which  is  more  fertile  or  better 
situated  will  yield  a  surplus  revenue  measured 
in  amount  by  the  extent  of  its  superiority  over 
the  poorest  or  marginal  land.  This  surplus  is 
economic  rent.  Land  cannot  be  said  to  yield  a 
rent  unless  after  paying  wages  and  interest  and 
profits  there  is  a  clear  surplus  to  which  neither 
the  farmer  nor  his  laborers  nor  the  capitalist 
from  whom  he  may  have  borrowed  his  capital 
can  establish  a  claim. 

This  surplus  exists  whenever  there  are  differ- 
ences in  fertility,  unless  the  poorer  soils  are 
cultivated  at  an  actual  loss.  This  may  no 
doubt  be  done  temporarily  and  even  for  many 
years,  if  there  are  personal  reasons  for  keeping 
up  an  estate  or  sinking  each  year  capital  with- 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      349 

drawn  from  other  sources.  Such  a  policy  is 
unsound  except  in  so  far  as  such  motives  in- 
duce keener  activity  and  so  lead  to  the  creation 
of  new  capital.  Ordinary  economic  motives 
would  prompt  the  withdrawal  of  capital  from 
the  unprofitable  cultivation.  This  would  usually 
involve  merely  a  change  of  products,  and  prob- 
ably such  change  would  affect  only  the  less 
productive  portions  of  the  farms  or  estates  in 
question.  Careful  examination  would  show  that 
there  are  even  in  small  farms  some  fields  the 
cultivation  of  which  pays  more  liberally  than 
that  of  others.  The  margin  of  cultivation  is 
kept  lower  because  of  the  natural  reluctance  to 
radical  change  in  location,  in  crops,  or  in 
methods  of  cultivation.  The  conception  of  rent 
has  been  extended  to  cover  differences  in  pro- 
ductive capacity,  whether  arising  from  fertility 
or  from  peculiarly  favorable  location.  Rent  is 
paid  on  lands  other  than  agricultural,  in  accord- 
ance with  the  same  general  principle.  A  mini- 
mum rent  is  fixed  by  the  relative  fertility  of  the 
soil  for  agricultural  purposes,  but  the  rent  may 
rise  indefinitely  from  this  point  in  accordance 
with  the  desirability  of  location. 


350  ECONOMICS 

The  payment  of  rent  does  not  increase  the  ex- 
penses of  production.  This  follows  from  the 
manner  in  which  rent  is  determined.  The  ex- 
penses of  production  are  greatest  on  the  land 
which  pays  no  rent.  The  value  of  the  commodi- 
ties are  not  greater  on  account  of  this  greater 
expense,  since  there  is  but  one  price  for  com- 
modities in  a  given  market.  Rent  is  paid  on  the 
superior  soils,  because  the  value  is  great  enough 
to  leave  a  surplus,  after  meeting  the  ordinary 
expenses  of  production.  The  value  is  not  high 
because  rent  is  paid,  but  rent  is  paid  because 
the  value  is  high  enough  to  warrant  it.  Rent 
is,  then,  an  effect,  not  a  cause,  of  the  high  value. 
If  the  value  were  to  fall,  the  result  would  be  to 
diminish  rents,  but  it  would  be  done  indirectly. 
The  fall  in  value  would  render  unprofitable  the 
cultivation  of  the  marginal  lands,  and  this  cul- 
tivation would  cease.  The  margin  would  then 
be  at  a  higher  point,  since  the  rent  of  a  given 
piece  of  land  is  determined  by  the  difference  be- 
tween its  yield,  and  the  yield  of  the  land  at  the 
margin  of  cultivation,  and  since  the  subtrahend 
is  now  larger  than  before,  while  the  minuend 
remains  the  same,  it  follows  that  the  remainder, 


RESTATEMENT  OF  FAMIIJAR  PRINCIPLES      35  I 

constituting  rent,  will  be  smaller.  This  result 
can  be  permanent  only  when  the  total  demand 
has  actually  diminished.  With  an  increasing, 
or  even  with  a  stable  population,  the  demand 
constantly  augments,  and  rent  will  not  fall  in 
the  manner  just  described,  except  on  lands  suited 
only  for  the  production  of  some  particular  crop 
which  has  been  displaced  by  others  of  greater 
utility. 

There  is,  however,  another  manner  in  which 
rents  may  be  made  to  fall,  viz.,  by  the  improve- 
ment of  the  poorer  lands.  A  rise  in  the  margin 
which  results  from  the  fact  that  poorer  lands 
have  been  improved  more  rapidly  than  the 
better  ones,  is  accompanied,  not  by  a  lessening, 
but  by  an  increase,  of  the  total  supply.  But  the 
effect  is  to  diminish  rents  since  it  lessens  the 
differences  in  soils,  and  it  is  upon  the  differences 
that  rent  depends.  Farmers  spend  more  on  the 
improvement  of  the  less  productive  portions  of 
their  farms,  and  public  internal  improvements 
are  directed  toward  the  bringing  into  cultivation 
of  soil  not  now  available.  The  general  effect 
is  a  diminution  of  agricultural  rents.  In  the 
cities  the  improvement  of  transportation  facili- 


352  ECONOMICS 

ties,  the  clearing  out  of  the  slums,  the  tendency 
of  population  into  the  suburbs,  have  a  similar 
influence  upon  land  rents.  The  receipt  of  rent, 
then,  is  due  to  the  possession  of  superior  soils 
at  a  time  when  the  cultivation  of  inferior 
soils  is  essential  to  the  supply.  The  degree 
of  superiority  over  the  poorest  land  in  use  is 
the  measure  of  rent.  It  is  a  surplus  revenue 
and  does  not  add  to  the  expenses  of  produc- 
tion. 

The  profits  of  employers  add  nothing  to  the  ex- 
pense of  production.  Profits,  in  the  more  accu- 
rate use  of  that  term,  which  excludes  interest, 
insurance,  and  the  like,  is  a  surplus  revenue  like 
rent,  and  is  determined  in  a  similar  manner. 
The  credit  for  first  working  out  the  analogy 
between  profits  and  rent  belongs  to  Francis  A. 
Walker.  A  manager  of  superior  ability  takes 
charge  of  an  industry  in  which  there  has  been 
no  profit,  and  by  his  better  management  creates 
one.  He  discovers  economies,  secures  materials 
at  less  expense,  introduces  better  methods, 
finds  a  better  market,  and  in  general  adds  a  net 
surplus  to  the  product  of  the  industry.  As 
there  are  soils  of  different  grades  of  fertility,  so 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      353 

there  are  employers  of  different  grades  of  ability. 
Those  at  the  lower  margin  carry  on  their  indus- 
tries with  at  least  as  great  expense  in  the  way 
of  wages,  interest,  materials,  etc.,  as  fall  to  the 
share  of  the  superior  managers,  and  their  lack 
of  skill  keeps  the  output  relatively  small. 

Here,  as  in  the  case  of  land,  a  fall  in  profits 
may  be  brought  about  in  either  of  two  ways, 
one  socially  disadvantageous,  the  other  with  an 
opposite  effect.  If  the  general  condition  of  in- 
dustry is  unfavorable,  so  that  fewer  goods  are 
demanded,  many  employers  will  fail  and  suspend 
their  business.  The  margin  of  employment 
will  then  rise.  Many  laborers  will  be  thrown 
out  of  employment.  Capital  will  lie  idle.  The 
more  able  and  skilful  employers  will  continue 
their  productive  enterprises,  but  since  the  dif- 
ferences between  employers  are  now  less,  prof- 
its which  depend  upon  those  differences  will  be 
smaller.  If,  on  the  other  hand,  the  differences 
are  diminished  by  a  change  in  the  character  of 
the  poorer  grades,  the  social  result  will  be 
favorable.  The  ignorant  and  shortsighted  busi- 
ness man  is  replaced  by  one  of  keen  insight  and 
executive  ability.     The  new  competiJi0iA=£auaSs^ 

2A 

UlMIVEkS/TY 


354  ECONOMICS 

a  decline  of  profit,  but  the  community  in  general 
is  better  off. 

The  test  of  productiveness  is  the  net  produce  or 
surplus.  Both  rent  and  profits  have  been  looked 
upon  as  a  part  of  the  net  produce  or  surplus  of 
industry.  A  reduction  of  rent  and  of  profits 
has  been  represented  to  be  of  social  advantage 
if  caused  by  a  rise  of  the  margin  of  production 
through  the  process  of  improving  the  quality  of 
the  land  at  the  margin,  or  the  men  whose  con- 
trol of  industry  is  marginal.  The  essential 
element  in  such  a  decrease  of  rent  or  profits  is 
that  it  does  not  in  any  respect  decrease  the 
surplus,  but  merely  transfers  it  from  a  partic- 
ular class  of  producers  to  consumers,  or  to 
other   producers. 

Speaking  generally,  all  of  rent  and  of  pure 
profit,  all  that  part  of  interest  which  is  not  a 
return  for  present  saving,  and  a  considerable 
part  of  laborers'  income,  belongs  to  the  net  prod- 
uce or  social  surplus.  Those  who  engage  in 
production  at  a  real  cost  ^  must  receive  from  the 
total  industrial  product,  as  a  minimum  share, 
whatever  amount  is  necessary  to  replace  their 

1  See  p.  155. 


RESTATEMENT  OF  FAMILIAR  PRINCIPLES      355 

costs.  This  is  the  absolute  condition  of  a  con- 
tinuance of  -  industrial  activity.  Whatever  re- 
mains is  the  surplus  created,  not  by  the  personal 
activity  of  the  individual,  but  by  the  coopera- 
tion of  all  industrial  classes  aided  by  the  forces 
of  labor  and  by  the  accumulations  of  past  in- 
dustry. The  real  test  of  industry  is  the  amount 
of  this  surplus.  The  physiocrats,  who  were  the 
most  prominent  economists  before  Adam  Smith, 
thought  that  a  net  produce  was  to  be  found 
only  in  agriculture.  Adam  Smith  discovered  it 
in  manufactures  also  and  traced  it  chiefly  to  the 
division  of  labor.  Modern  economics  still  further 
expands  the  idea  to  make  it  include  whatever 
portions  of  the  product  of  industry  and  com- 
merce are  not  to  be  set  aside  for  the  reimburse- 
ment of  costs. 


CHAPTER    XVI 

OBSTACLES   TO    SOCIAL    PROGRESS 

By  social  progress  is  meant  the  gradual  in- 
crease and  diffusion  of  wealth,  accompanied  by 
the  unfolding  of  human  capacity  to  enjoy  it. 
General  prosperity  may  be  promoted  by  a  wiser 
choice  of  commodities,  by  a  decrease  in  their 
real  cost,  or  by  a  more  intelligent  use  of  them. 
Every  advance  in  any  one  of  these  three  direc- 
tions is  a  step  in  social  progress.  Anything 
which  blocks  advancement  in  any  of  these  direc- 
tions is  an  obstacle  to  social  progress.  There 
are  innumerable  obstacles,  some  temporary, 
others  lasting ;  some  in  physical  nature,  others 
in  man  himself ;  some  baffling  the  best  efforts 
of  the  entire  race,  others  acting  only  as  an  in- 
strument in  the  separation  of  the  efficient  from 
the  weak,  enabling  the  stronger  to  crush  out 
the  more  quickly  their  unsuccessful  competitors. 

One  of  the  obstacles  that  has  received  most 
attention  because  of  its  relation  to  other  parts 
356 


OBSTACLES  TO   SOCIAL  PROGRESS  357 

of  political  economy  is  the  law  of  diminishing 
returns.  The  niggardliness  of  nature  has  been 
held  to  be  the  chief  limitation  to  industrial  prog- 
gress.  A  brief  statement  and  illustration  of  the 
law  has  already  been  given. ^  It  is  undoubtedly 
true  that  there  are  limits  to  profitable  agricultural 
investment  on  a  given  piece  of  land.  A  piece 
of  ground  which  is  well  adapted  to  agriculture 
may  not  be  well  adapted  by  location  for  building 
or  for  any  other  purpose  than  farming.  When 
the  owner  has  expended  upon  it  a  sufficient 
amount  to  secure  its  full  normal  yield,  any 
additional  expenditure  will  make  a  very  slight 
addition  to  the  yield,  or  perhaps  none  at  all.  If 
it  were  possible  for  him  to  go  on  increasing  his 
investment  indefinitely  with  constant  returns, 
no  farmer  would  ever  need  to  own  more  than 
five  or  ten  acres,  since  he  could  secure  whatever 
additional  crop  he  desired  by  simply  putting 
more  men  at  work,  and  sowing  additional  seed 
in  his  small  farm.  Practical  experience  would 
show  that  when  the  point  has  been  reached 
which  gives  the  crop  that  is  planted  a  fair 
chance  of   success,   it  will   not   be  very  much 

1  See  p.  346. 


358  .        ECONOMICS 

increased  by  additional  work,  and  if  any  more 
men  are  to  be  employed  profitably  it  must  be  on 
new  land.  Is  this  fact  then  to  be  regarded  as 
one  of  the  physical  obstacles  to  progress  ?  Not 
unless  the  general  reason  for  our  inability  to 
secure  a  larger  crop  from  a  given  area  lies  in 
physical  nature,  where,  in  fact,  as  a  rule,  it  is 
not  to  be  found. 

With  any  given  method  of  cultivation,  and  with 
a  given  crop,  and  with  only  traditional  measures 
of  precaution  against  damage  from  frost  and 
other  dangers,  the  farm  will  on  an  average  pro- 
duce just  so  much  grain  and  no  more.  But  if 
the  cultivators  discover  new  methods  of  cultiva- 
tion, better  fertilizers,  and  a  more  productive 
seed,  and  especially  if  changes  in  the  habits 
and  wants  of  consumers  enable  new  crops  to 
be  substituted,  the  total  yield  may  be  increased 
indefinitely.  Taking  into  account  larger  areas, 
improvements  in  transportation  similarly  in- 
crease the  agricultural  product  by  bringing 
new  lands  into  cultivation,  thus  relieving  the 
older  lands  from  the  necessity  of  producing 
crops  for  which  they  were  unsuited,  and  ena- 
bling their  cultivators  to  use  them  more  profit- 


OBSTACLES  TO   SOCIAL  PROGRESS  359 

ably.  A  rough  test  of  the  whole  process  is  to 
be  found  in  the  price  of  food.  If  land  is  subject 
to  a  law  of  diminishing  returns,  and  cultivators 
are  being  forced  to  ever  poorer  lands  in  order 
to  meet  the  demands  of  increasing  population, 
there  will  be  seen  a  general  tendency  of  food  to 
increase  in  price.  The  poorer  lands  cannot  be 
cultivated  unless  the  price  of  food  is  high  enough 
to  meet  the  increased  expense,  and  this  price 
will  of  course  become  general.  If,  on  the  con- 
trary, the  price  of  food  is  decreasing,  this  may 
be  taken  as  evidence  that  the  law  of  diminishing 
returns  is  not  in  operation,  or  that  it  is  counter- 
acted by  other  and  stronger  tendencies.  And 
such  is  indeed  the  case.  Agricultural  products 
in  general  have  fallen  rather  than  risen  in  price 
in  the  last  generation  and  in  the  last  fifty 
years. 

There  is  a  law  of  diminishing  returns,  but  the 
actual  limitations  experienced  in  agriculture,  as 
in  other  industries,  lie  rather  in  social  than  in 
physical  causes.  Under  given  social  conditions 
we  can  obtain  only  so  much  by  our  efforts,  but 
the  so'cial  conditions  may  be  changed  and  are 
constantly  changing,  and  there  is  no  reason  why 


36o  ECONOMICS 

in  the  future  they  may  not  more  than  counter- 
balance any  restraint  imposed  by  physical  nature. 
As  a  writer  has  said,  not  the  niggardliness  of 
nature,  but  the  stupidity  of  man,  causes  diminish- 
ing returns  in  agriculture  and  elsewhere.  When- 
ever additional  capital  and  labor  are  applied  at  a 
given  point  because  a  new  use  has  been  found 
for  them,  they  will  often  bring  increased  instead 
of  diminished  returns.  Thus  there  are  limits 
which  seem  to  lie  in  physical  nature,  but  which 
are  nevertheless  set  aside  by  social  changes. 

Other  obstacles  will  be  recognized  as  dis- 
tinctly social  and  economic,  rather  than  physi- 
cal. The  accumulation  of  capital  is  essential 
to  social  progress,  but  one  of  the  chief  ob- 
stacles to  such  accumulation  in  early  stages 
of  society  is  lack  of  security.  There  is  no 
sufficient  motive  to  accumulate  if  the  hoard 
is  to  be  seized  by  any  stronger  rival  or  enemy. 
Better  enjoy,  while  others  are  doing  so,  the 
result  of  the  chase  or  of  war,  than,  by  saving 
the  share  assigned  to  you,  become  the  prey 
of  those  who  are  able  to  rob  you.  The  tribal 
system  introduces  some  elements  of  security. 
The   ownership   of    property   being   vested    in 


OBSTACLES  TO  SOCIAL   PROGRESS  36 1 

the   entire   tribe,    it   becomes   the   duty  of   all 
to  fight,  if  necessary,  for  its  protection. 

The  recognition  of  private  property  intro- 
duces, it  may  be,  temporary "  confusion  by 
again  throwing  at  first  the  defence  of  private 
rights  upon  the  individual ;  but  with  an  im- 
provement of  social  order  and  a  full  recogni- 
tion of  the  importance  of  police  functions  of 
the  state,  there  comes  a  stronger  guarantee 
of  security  than  before  private  property  is 
established.  What  is  even  more  important, 
there  is  developed  a  general  respect  for  the 
sacredness  of  property.  There  is  not  only 
less  power,  but  there  is  also  less  disposition, 
to  interfere  with  the  property  rights  of  others. 
Even  those  who  have  but  little  property  real- 
ize that  they  are  better  off  when  that  little 
is  safe  than  when  it  is  liable  to  capture  or 
wanton  destruction.  This  obstacle  to  social 
progress  from  a  lack  of  security  is  one  that 
must  be  overcome  even  more  completely  than 
at  present ;  and  the  most  practicable  method 
is  a  better  education  in  the  advantages  derived 
from  social  security  and  a  pointing  out  of 
the  petty  causes  that  threaten   it,  rather  than 


362  ECONOMICS 

an  increase  of  police  vigilance  or  government 
interference,  except  in  the  extreme  cases 
where  these  may  be  necessary.  Society  gains 
more  from  the  growth  of  sound  social  instincts 
than  from  external  pressure. 

Still  another  obstacle  to  social  progress  is 
to  be  removed  only  by  slow  educational  pro- 
cess. The  lack  of  saving  instincts  has  had 
even  more  to  do  with  the  comparative  failure 
of  communities  which  have  no  capital  than  a 
lack  of  security.  Improvidence,  lack  of  fore- 
sight, inability  to  anticipate  future  wants,  a 
vague  feeling  that  some  lucky  chance  will 
carry  one  through  future  difficulties,  —  these 
characteristics  survive  too  frequently  even  in 
the  most  advanced  communities.  Observa- 
tion will  convince  that  the  ones  who  succeed 
are  they  who  do  most  keenly  appreciate  the 
future,  who  take  far  in  advance  the  initial 
steps  in  securing  the  objects  which  they  most 
desire,  who  accumulate  capital  with  infinite 
care,  but  who  do  not  hesitate  to  invest  it 
boldly  at  the  right  moment.  For  it  must 
not  be  forgotten  that  saving  instincts  demand 
expenditure   no   less   than  accumulation.     The 


OBSTACLES   TO   SOCIAL   PROGRESS  363 

capitalist  is  not  he  who  hoards  wealth,  but  he 
who  saves  and  uses  capital.  The  use  begins 
as  early  and  is  as  indispensable  as  the  saving. 
This  obstacle  to  social  progress  in  the  lack  of 
saving  instincts  has  been  overcome  in  the 
past  by  the  ruthless  defeat  in  life's  struggle 
of  those  who  are  without  them,  and  a  slow 
but  sure  conquest  of  such  persons  by  those 
who  do  their  work  in  serial  methods  with  an 
eye  to  the  needs  of  the  future.  There  is  no 
other  way  in  which  it  can  be  overcome  in 
the  future  except  as  saving  instincts  may 
be  implanted,  and  developed  in  all  classes  by 
educational  means. 

Until  recent  times  the  greatest  of  all  the  ob- 
stacles to  social  progress  has  been  the  lack  of 
directive  intelligence,  of  industrial  enterprise,  of 
skill  in  management  of  the  kind  shown  by  men 
whom  we  are  accustomed  to  designate  as  cap- 
tains* of  industry.  It  was  not  a  lack  of  intelli- 
gence, for  this  has  been  displayed  as  profusely 
in  earlier  ages,  but  mental  activity  was  directed 
into  other  dhannels  than  the  supply  of  common 
wants  and  the  increase  of  the  agencies  that  tend 
to  harmonize  and   elevate  those  wants.     War, 


364  ECONOMICS 

religion,  and  art,  and  passion  have  claimed  the 
highest  energies  of  man.  All  of  these  are  social 
and  all  have  contributed  to  social  progress,  but 
due  attention  to  the  industrial  organization  of 
society  is  likewise  essential.  An  effective  ad- 
ministration of  the  machinery  by  which  the  or- 
dinary wants  of  men  are  supplied  has  been 
secured  only  in  our  own  time,  and  is  even  now 
far  from  satisfactory  in  many  departments  of 
industry.  But  many  of  the  ablest  men  of  every 
land  are  now  engaged  upon  it.  The  most  in- 
ventive and  constructive  minds  are  directly  em- 
ployed in  improving  the  ways  in  which  goods 
are  made.  Others  equally  able  are  inquiring 
into  the  best  ways  of  using  them.  The  obsta- 
cle from  this  quarter  has  therefore  already  be- 
come less  serious,  and  we  may  expect  that  even 
greater  abilities  will  be  concentrated  upon  these 
problems. 

Man  is  a  progressive  being  and  shows  woiider- 
ful  capacity  for  conquering  obstacles  that  seem 
insurmountable.  One  after  another  they  are 
overcome  by  the  more  venturesome  and  the 
stronger.  Less  and  less  they  tend  to  assume  a 
definite   and   permanent   form.     Land,  capital, 


OBSTACLES  TO   SOCIAL  PROGRESS  365 

and  directing  skill  become  in  turn  limiting  fac- 
tors. A  lack  of  any  one  is  a  serious  obstacle, 
but  it  cannot  be  said  abstractly  that  the  lack  of 
any  one  is  more  serious  than  that  of  another. 
Which  one  is  in  fact  lacking  at  a  given  time  is 
only  to  be  ascertained  by  direct  observation,  or 
by  the  terms  which  those  who  have  it  to  offer 
are  able  to  make.  It  is  probable  that  at  present 
in  civilized  countries  labor  is  more  scarce  than 
any  one  of  the  other  necessary  elements/  For  it 
is  possible  that  efficient  labor  may  also  be  lack- 
ing and  that  this  deficiency  may  prove  an  obsta- 
cle. It  is  less  to  be  regretted  than  any  other, 
however,  for  where  it  exists  it  implies  a  high 
reward  to  labor.  This  is  itself  a  favorable  con- 
dition for  social  progress  where  labor  is  free. 
A  relatively  large  income  for  laborers  tends  to 
secure  that  diffusion  of  the  benefits  of  industrial 
progress  which  is  an  indispensable  condition  of 
social  progress.  It  was  pointed  out  in  the  clos- 
ing proposition  concerning  industry,  that  a  dif- 
fusion of  knowledge  is  desirable  for  industrial 
reasons.  Inversely,  a  wider  diffusion  of  wealth - 
is  desirable  for  its  social,  educational,  and  moral 
results.     As  nearly  as  it  is  safe  to  formulate  a 


366  ECONOMICS 

social  ideal,  we  may  find  it  in  a  state  of  society 
in  which  the  only  serious  obstacle  to  further 
progress  lies  in  the  lack  of  a  sufficient  number 
of  persons  to  fully  utilize  the  capital,  land,  and 
directive  energy  in  existence. 

We  may  now  venture  upon  a  more  specific 
enumeration  of  a  few  of  the  positive  obstacles 
to  social  progress  encountered  by  various  com- 
munities in  greater  or  less  degree.  First  may 
be  mentioned  a  bad  climate  and  a  lack  of 
natural  advantages,  not  because  these  are  first 
in  importance,  but  because  they  are  most  obvi- 
ous, and  they  are  only  to  a  very  moderate  extent 
traceable  to  man's  agency.  Something  can  be 
done  by  the  planting  of  trees,  by  irrigation,  and 
in  other  ways  to  modify  an  unfavorable  climate, 
and  much  may  be  done  to  overcome  its  effects 
upon  human  beings  and  animals  ;  but  an  abso- 
lute lack  of  the  materials  of  industry  can  be 
overcome  only  by  enlarging  the  environment 
to  include  regions  more  favored. 

A  despotic,  or  a  corrupt,  or  an  inefficient  gov- 
ernment may  do  more  to  retard  progress  than 
an  unfavorable  climate,  or  poverty  of  resources. 
Of  the  three  species  of  bad  government,  it  is 


OBSTACLES  TO   SOCIAL   PROGRESS  367 

difficult  to  decide  which  is  the  most  obnoxious. 
A  despotic  government  destroys  individual  ini- 
tiative and  self-reliance ;  a  corrupt  government 
saps  confidence  and  undermines  the  virtues 
upon  which  social  progress  depends  ;  an  inef- 
ficient government  withholds  the  cooperation 
upon  which  citizens  have  a  right  to  rely.  None 
of  them  accomplishes  the  legitimate  industrial 
end  of  government  in  acting  as  a  channel 
through  which  citizens  may  freely  and  effec- 
tively unite  for  those  mutual  services  which 
are  better  accomplished  in  cooperation  than  in 
isolation.  A  government  which  is  strong,  pure, 
and  free,  is  not  a  ''necessary  evil,"  but  an  excel- 
lent means  of  securing  worthy  ends.  When 
it  becomes  deficient  in  any  of  these  essential 
respects  it  becomes  in  so  far  an  obstacle. 

^Intemperance  and  immorality  of  every  other 
kind  are  socially  dangerous.  They  are  an 
obstacle  to  the  efficient  making  of  goods,  for 
this  requires  a  steady  hand  and  clear  brain. 
They  are  an  obstacle  to  the  right  use  of  goods, 
for  this  demands  personal  character  of  the  best 
type.  They  totally  prevent  the  wisest  choice  of 
goods,  and  so  stand  as  obstacles  in  each  of  the 


368  ECONOMICS 

three  ways  of  possible  advancement.  Strong 
drink  may  not  be  responsible  for  so  large  a 
part  of  poverty  as  is  sometimes  represented  in 
^ysferrcal "  statistics,  but  it  is  nevertheless 
one  of  the  chief  obstacles  to  social  progress ; 
and  by  its  side  must  be  put  over-indulgence  in 
rich  food  and  in  personal  adornment  and  house- 
hold furniture  that  are  discordant,  extravagant, 
and  in^bad  taste.  This  whole  group  of  obstacles 
may  be  described  as  the  wilful  substitution  of 
lower  for  higher  pleasures.  Vice  and  folly 
account,  not  only  for  personal  ruin,  but  for  social 
stagnation.  I 

/  An  applicant  for  appointment  in  a  benevolent 
society  was  recently  asked  to  name  in  a  word 
the  most  important  cause  of  pauperism.  He 
replied  without  hesitation,  "jidiel-giving. "  The 
questioner,  a  high  authority  on  the  subject, 
accepted  the  reply  as  correct.  Indiscriminate 
giving  is  an  obstacle  to  social  progress.  It 
creates  paupers  and  subjects  to  temptation 
many  who  are  entirely  competent  to  make  their 
own  living.  It  transforms  many  of  those  who 
might  add  to  the  social  wealth  into  social  para- 
sites  living  on   the  wealth  created  by  others. 


OBSTACLES  TO  SOCIAL  PROGRESS  369 

The  withdrawal  of  indiscriminate  pubHc  relief 
has  generally  been  followed  by  a  diminution  of 
poverty  and  a  general  improvement  of  the  con- 
dition of  society.  Social  progress  demands  not 
less  of  fraternal  helpfulness,  but  less  encourage- 
ment to  mendicancy,  and  less  carelessness  con- 
cerning the  ultimate  effects  of  alms. 

War,  civil  and  foreign,  has  been  one  of  the 
great  destroyers  of  commerce  and  industry.  It 
has  absorbed  energies  which  might  have  made 
for  social  progress.  It  has  developed  anti- 
social habits  and  instincts.  It  has  taken  the 
lives  of  the  best  workers  and  has  saddled  upon 
nations  intolerable  burdens  of  debt.  There 
have  been  many  compensations.  War  has  at 
times  been  a  civilizer  and  a  useful  school  for 
peoples  who  were  having  too  little  domestic  and 
foreign  social  contact.  But  under  present  con- 
ditions such  contact  is  secured  by  commerce 
and  peaceful  intercourse.  War  and  preparations 
for  war  are  obstacles  to  the  inter-exchange  of 
goods  and  of  ideas  among  the  nations  of  the 
earth,  and  upon  such  changes,  progress  is  most 
closely  dependent.  The  cost  of  enormous  mili- 
tary armaments  must  be  reckoned  among  those 


370  ECONOMICS 

obstacles  to  social  progress  which  might  be  re- 
moved. 

Overcrowding  of  population  in  the  cities  and 
an  unduly  wide  scattering  of  population  in 
newly  settled  communities  are  both  unfavorable 
conditions.  In  the  overcrowded  tenement  houses 
it  is  impossible  to  furnish  a  healthful  environ- 
ment for  children ;  it  is  difficult  to  satisfy  the 
ordinary  bodily  demands  for  breathing-space  and 
light ;  and  it  is  unreasonable  to  expect  other 
than  unfavorable  effects  from  the  strain  imposed 
by  constant  living  in  the  very  midst  of  a  densely 
packed  throng.  Good  work  and,  still  more, 
proper  enjoyment  of  the  results  of  work,  require 
hours  of  relaxation  and  quiet.  These  are  ob- 
tained by  the  isolated  pioneer,  but  at  the  ex- 
pense of  that  social  contact  which  is  likewise 
essential  to  human  progress.  Farm  life  in 
America  has  this  drawback  in  a  peculiar  degree, 
because  each  family,  as  a  rule,  lives  on  its  own 
farm  instead  of  in  villages  as  in  European 
countries.  An  American  farmer  travelHng  by 
rail  through  the  most  populous  provinces  of 
Germany  will  be  surprised  at  the  comparatively 
deserted  appearance  of  the  country.     He  does 


OBSTACLES  TO   SOCIAL  PROGRESS  371 

not  see  farmhouses  scattered  here  and  there,  as 
at  home,  with  a  grove  of  trees  about  each.  The 
houses  are  grouped  in  an  almost  continuous  line 
of  villages  along  a  well-built  road,  and  the  trees 
are  in  forests  planted  and  guarded  by  the  State. 
The  disadvantages  of  the  American  system 
become  more  apparent  as  communities  emerge 
from  the  pioneer  stage  and  begin  to  attach  more 
importance  to  social  intercourse.  Many  re- 
formers are  beginning  to  see  the  importance  of 
adding  to  the  interest,  variety,  and  attractiveness 
of  American  farm  life.  Anything  which  will 
accomplish  this  will  relieve  the  difficulties  both 
of  oversparseness  and  of  overcrowding. 

One  of  the  surest  indications  of  satisfactory 
progress  is  the  absence  of  too  heavy  physical 
labor  by  women  and  children.  The  invention 
of  machinery,  while  it  is  in  itself  a  blessing,  has 
sometimes  proved  almost  a  curse  by  increasing 
the  opportunities  for  child  labor.  This  is  one 
of  the  subjects  upon  which  there  are  few  advo- 
cates of  a  laissez-faire  policy.  All  are  agreed 
that  parents  ought  not  to  be  permitted  to  sacri- 
fice the  mental  and  physical  development  of 
their  children  by  putting  them  at  heavy  or  long- 


372  ECONOMICS 

continued  work  as  soon  as  it  would  be  possible 
for  them  to  earn  wages.^  Aside  from  the  bad 
effect  upon  physical  growth  it  is  short-sighted 
and  wasteful  from  the  social  standpoint.  This 
is  the  time  for  education,  and  the  education 
should  be  as  nearly  as  possible  to  the  whole 
mind  and  body.  The  experiences  of  the  race 
should  be  passed  on  unbrokenly,  and  up  to  a 
certain  point  these  experiences  can  be  imparted 
to  all  the  children  of  men.  Laws  prohibiting 
child  labor  and  requiring  attendance  at  school, 
or  other  suitable  provision  for  youthful  training, 
are  therefore  in  the  interests  of  progress. 

Woman  labor  on  the  farm  or  in  the  factory 

1  In  the  large  stamping  works  and  canning  factories  in  a  city 
like  Chicago,  not  a  day  passes  but  some  child  is  made  a  help- 
less cripple.  These  accidents  occur  after  three  o'clock  in  the 
afternoon.  The  child  that  has  begun  his  work  in  the  morning 
with  a  reasonable  degree  of  vigor,  after  working  under  constant 
pressure  for  several  hours,  at  about  three  o'clock  becomes  so 
wearied,  beyond  the  point  of  recovery,  that  he  can  no  longer 
direct  the  tired  fingers  and  aching  arms  with  any  degree  of  ac- 
curacy. He  thus  becomes  the  prey  of  the  great  cutting  knives, 
or  of  the  jaws  of  the  tin-stamping  machine.  Proper  factory 
legislation  would  prevent  young  children  from  working  so  many 
hours  as  to  become  wearied  to  the  point  of  danger. —  Professor 
William  O.  Krohn  before  the  National  Conference  of  Charities 
and  Correction,  1897. 


OBSTACLES  TO   SOCIAL   PROGRESS  373 

may  prove  socially  disadvantageous,  but  it  cannot 
well  be  forbidden  or  closely  regulated.  Any  at- 
tempt to  do  that  wrould  bring  greater  injury 
than  relief.  The  opening  of  new  occupations, 
rather  than  the  closing  of  old  ones,  is  the  true 
path  to  progress.  The  necessity  of  breaking 
up  or  neglecting  the  home  in  order  that  women 
may  earn  wages  in  the  heavier  manual  occupa- 
tions is  nevertheless  always  to  be  deplored. 
Social  progress  is  not  accelerated,  but  retarded, 
by  any  such  interference  with  normal  family 
life. 

An  improper  diet  must  be  given  a  prominent 
place  among  the  obstacles  to  social  progress. 
Food  that  is  not  nutritious,  that  is  improperly 
cooked,  that  does  not  contain  the  food  elements 
in  a  well-balanced  proportion,  that  is  not  suited 
to  the  climate,  or  that  is  unduly  expensive,  is 
far  more  common  than  that  which  combines 
the  qualities  of  a  good  diet.  We  need  not  go 
so  far  as  to  ascribe  the  poverty  of  Ireland  to  the 
potato,  or  that  of  India  to  rice,  for  diet  is  but 
one  element  of  the  standard  of  living  ;  and  many 
causes  may  unite  to  bring  a  people  to  a  condi- 
tion in  which  a  cheap  article  of  diet  will  alone 


374  ECONOMICS 

prevent  famine.  But  changes  in  diet  come 
very  near  the  beginning  of  progress,  marking 
the  line  between  primitive  and  progressive  com- 
munities. And  in  the  most  advanced  stages,  a 
nation  finds  one  of  its  chief  sources  of  strength 
or  weakness  in  the  character  of  its  diet.  If  it 
is  inexpensive,  varied,  and  nutritious ;  if  its 
various  items  contain  the  food  elements  in  the 
proportions  in  which  the  body  can  use  them ; 
and  if,  finally,  it  is  of  a  character  that  makes 
the  best  use  of  the  available  natural  resources, 
—  then  it  is  an  economical  diet  and  a  source  of 
social  prosperity.  The  obstacle  to  social  prog- 
ress which  is  here  emphasized  is  not  so  much 
the  absence  of  the  materials  for  a  proper  diet, 
as  the  absence  of  skill  in  cooking  and  in  buying 
provisions  that  prevents  poorer  families,  and  also 
the  families  of  larger  means  who  rely  upon 
ignorant  cooks,  from  getting  what  they  might 
from  the  food  within  reach. 


CHAPTER   XVII 

DISPOSITION    OF    THE    SOCIAL    SURPLUS 

The  entire  product  of  industry  is  distributed 
among  those  who  have  helped  in  the  production, 
or  have  otherwise  established  a  recognized  claim 
to  a  share  in  it.  Every  producer  receives  a  mini- 
mum share  sufficient  to  cover  actual  costs,  and  if 
in  a  favorable  economic  position,  a  share  also  in 
the  surplus.  This  surplus  arises  from  the  in- 
creased efficiency  of  labor,  the  invention  of 
machinery,  the  discovery  of  natural  resources, 
the  accumulation  of  capital,  the  development  of 
new  kinds  of  human  ability,  the  substitution  of 
a  more  economical  diet,  a  removal  to  more  favor- 
able environment,  and  the  various  other  ways  of 
reducing  costs  and  increasing  utilities.  There 
is  a  surplus  as  soon  as  industry  provides  more 
than  enough  to  replace  all  costs,  giving  to  each 
producer  the  amount  of  his  investments,  includ- 
ing the  cost  of  subsistence  during  production. 
Even  in  an  undeveloped  state  of  industry,  nature 
375 


376  ECONOMICS 

may  be  so  liberal  that  there  is  a  surplus  in  agri- 
culture or  in  mining.  The  commercial  nations 
secure  a  surplus  by  carrying  products  to  places 
where  they  have  greater  value  ;  and  the  improve- 
ment of  the  industrial  organization,  by  introdu- 
cing the  division  of  labor,  machinery,  and  superior 
management,  gives  a  greater  surplus  still.  While 
these  changes  are  in  progress  there  are  also  so- 
cial changes  which  enable  people  to  do  equal 
work  with  less  loss  of  vitality,  and,  on  the  other 
hand,  to  obtain  greater  enjoyment  from  equal 
quantities  of  goods.  The  surplus  is  increased 
as  much  by  these  social  changes  as  by  the  ma- 
terial changes  which  directly  affect  the  making 
of  goods. 

One  who  turns  his  attention  to  the  subject  of 
economics,  as  soon  as  he  understands  its  scope, 
naturally  asks  himself  two  questions  :  Where  do 
goods  come  from .?  What  becomes  of  them  ? 
In  answering  the  first  question  we  soon  learn 
they  do  not  come  as  a  rule  from  the  labor  of  the 
person  who  has  possession  of  them,  or,  at  least, 
not  exclusively  from  his  labor.  Hundreds  of 
laborers,  many  of  them  skilled  mechanics,  others 
inventors,  others  travellers,  still  others  farmers. 


DISPOSITION  OF  THE   SOCIAL   SURPLUS      377 

miners,  and  merchants,  have  cooperated  to  make 
the  goods  in  question.  It  may  be  that  the  one 
who  now  has  them  has  performed  labor  which 
is  an  equivalent  for  all  of  this  labor  previously 
expended  by  others,  so  far  as  there  are  any  liv- 
ing claimants  for  an  equivalent ;  but  nature  has 
also  contributed,  permanent  improvements  made 
by  past  ages  have  been  utilized,  inventions  for 
which  the  patent  has  long  since  expired,  and 
methods  of  work  suggested  by  the  bright  minds 
of  previous  generations,  have  since  become  the 
common  property  of  mankind.  So  the  answer 
to  the  question  where  goods  come  from  is  not 
so  simple  as  it  appears.  It  is  found  only  in  a 
full  study  of  the  whole  field  of  economics.  One 
of  the  first  things  learned  about  it  is  that  for 
many  items  in  their  present  utility  you  cannot 
find  any  person  who  can  claim  to  have  incurred 
a  corresponding  cost,  and  therefore  that  society 
has  on  its  hands  a  surplus  to  be  distributed 
otherwise  than  in  accordance  with  the  law  of 
costs. 

The  answer  to  the  second  question :  What 
becomes  of  the  goods  produced  by  society .? 
will  bring  this  out  still  more  clearly.     In  fact, 


378  ECONOMICS 

goods  are  distributed  in  two  quite  distinct  ways. 
If  the  entire  product  of  industry  were  exactly 
large  enough  to  replace  actual  costs,  the  distribu- 
tion of  wealth  would  be  a  simple  matter.  Each 
producer  would  receive  from  the  product  suffi- 
cient to  cover  his  costs ;  the  laborers  and  man- 
ager enough  to  purchase  the  food  and  shelter 
absolutely  needed  to  keep  themselves  in  work- 
ing condition,  capitalists  enough  to  maintain 
their  capital,  landowners  enough  to  replace  the 
losses  from  cultivation.  Such  minimum  shares 
are  a  condition  of  the  continuance  of  indus- 
try. As  a  rule  we  use  the  word  wages  to  des- 
ignate the  income  of  laborers,  interest  that 
of  capitalists/  and  rent  that  of  landlords.  But 
where  there  are  only  minimum  shares,  as 
above  described,  there  is  no  interest,  for  this 
includes  only  the  return  obtained  for  the  use 
of  capital,  and  of  course  there  is  no  interest 
unless  the  capitalists  receive  something  more 
than  the  amount  which  they  have  invested. 
Similarly,  there  is  no  rent  under  such  circum- 
stances, for  there  is  no  income  deserving  this 
name  until  the  landlords  secure  from  the  mere 
possession  of  land  more  than  enough  to  cover 


DISPOSITION   OF  THE   SOCIAL   SURPLUS      379 

the  expenses  of  keeping  it  in  cultivation.  In  a 
state  of  slavery,  even  wages  are  absent,  and  we 
may  therefore  readily  imagine  industries  which 
only  replace  costs,  giving  to  each  class  of  pro- 
ducers a  minimum  share  sufficient  for  that  pur- 
pose, but  not  sufficient  to  afford  any  surplus. 

The  substitution  of  free  labor  for  slavery 
makes  necessary  the  payment  of  wages  even 
where  there  is  no  surplus,  but  the  mere  fact  that 
the  wage  system  is  adopted  is  no  indication  that 
laborers  are  receiving  more  than  the  minimum 
share  essential  to  the  continuance  of  a  laboring 
population.  Both  rent  and  interest,  however, 
are  an  indication  of  a  social  surplus.  Capital 
may  always  be  so  utilized  as  to  enable  society 
to  realize  a  surplus.  The  very  appearance  of 
capital  is  proof  that  labor  is  more  wisely  directed 
and  is  turning  into  more  efficient  channels. 
Rent  arises  from  the  cultivation  of  land  of  dif- 
ferent degrees  of  productiveness.  Costs  are 
covered  and  the  minimum  shares  obtained  on 
the  poorest  land  cultivated  and  the  rent  on  each 
better  grade  measures  the  differences  between 
the  yield  of  that  grade  and  the  poorest  land,  or 
the  land  at  the   margin  of   cultivation.     It   is 


38o  ECONOMICS 

purely  a  surplus  owing  its  existence  and  amount 
to  the  superior  productiveness  of  the  better 
grades  of  land.  The  total  income  of  capitalists, 
landlords,  and  laborers  is  thus  made  up  of  two 
parts :  one,  a  minimum  share  obtained  by  the 
physical  impossibility  of  contributing  to  industry 
without  it,  the  other,  a  share  in  the  surplus 
called  respectively  surplus  wages,  interest,  and 
rent. 

It  might  be  well  if  there  were  a  single  word 
to  represent  that  part  of  a  laborer's  income  which 
is  in  excess  of  his  costs,  corresponding  to  the 
surplus  income  of  capitalists  and  landlords. 
But  even  if  there  were  such  a  word  it  might  be 
impossible  to  make  the  distinction  in  practice. 
Commodities  consumed  by  man  serve  a  double 
purpose  in  sustaining  his  vitality  and  conferring 
pleasure.  Those  which  are  consumed  only  for 
the  second  purpose  often  really  serve  the  first 
as  well.  The  transition  from  necessary  wages 
to  surplus  wages  is  imperceptible.  Some 
laborers  might  even  deny  that  they  ever  receive 
surplus  wages  from  a  confusion  of  necessary 
wages  with  fair  or  just  wages.  But  it  is  per- 
fectly natural  and  just  that  laborers  should  share 


DISPOSITION   OF  THE   SOCIAL  SURPLUS      38 1 

in  the  surplus.     It  is  also  generally  possible  for 
them  to  do  so. 

The  law  of  costs  is,  then,  the  first  part  of  the 
law  of  distribution.  Every  class  whose  coop- 
eration is  required  in  production  will  receive 
from  the  product  such  a  part  as  will  put  it  in  the 
end  in  as  favorable  a  position  as  at  the  begin- 
ning. Every  loss  of  vitality  must  be  covered, 
every  personal  cost  made  good.  We  may,  in- 
deed, imagine  a  temporary  state  of  affairs  in 
which  costs  are  not  replaced.  Through  some 
extraordinary  pressure,  such  as  that  of  war  or 
religion,  a  community  may  permit  its  capital  to 
be  sacrificed,  its  population  diminished,  and  its 
natural  resources  squandered  in  some  undertak- 
ing which  gratifies  ambition  without  securing 
the  conditions  of  future  production.  But  such 
instances  are  exceptional  and  aid  in  proving  the 
rule,  for  the  exhaustion  of  national  strength 
that  would  follow  would  soon  make  impossible  a 
continuance  of  these  enterprises,  and;  taking 
into  account  the  rapidity  with  which  material 
wealth  is  used  up  when  not  constantly  replaced, 
it  seems  likely  that  the  law  of  costs  would  assert 
itself  very  quickly. 


382  ECONOMICS 

No  person  or  class  of  persons  is  assured  of  a 
living  or  of  a  minimum  share  in  distribution 
otherwise  than  by  contributing  to  the  social 
wealth  the  value  of  a  living.  The  law  of  costs 
is  not  a  statement  that  every  person  who  works, 
regardless  of  the  amount  and  quality  of  his 
work,  v^ill  receive  a  share  in  the  product  of  in- 
dustry. H  umanity  or  self-protection  may  prompt 
society  to  interfere  in  extreme  cases  to  prevent 
actual  starvation,  but  in  that  case  it  is  not  a 
minimum  share  in  distribution  that  is  awarded, 
it  is  a  gratuitous  share  of  the  surplus.  What  is 
assured  by  the  law  of  costs  is  that  each  class 
will  receive  in  return  for  its  participation  in  the 
work  of  society,  provided  its  assistance  is  effec- 
tive and  rightly  directed,  at  least  as  much  as  the 
effort  has  cost.  It  will  probably  receive  more, 
but  certainly,  as  a  rule  and  in  the  long  run,  not 
less.  If  there  is  only  enough  for  each  necessary 
class  of  producers  to  receive  so  much,  none  will 
receive  more  than  this  minimum  share,  and 
there  is  no  surplus  to  divide. 

Generally,  however,  the  sum  of  the  minimum 
shares  does  not  equal  the  total  product.  There  is 
then  a  competition  among  different  classes  for  this 


DISPOSITION  OF  THE  SOCIAL  SURPLUS      383 

free  portion.  Various  theories  have  been  put 
forward  to  account  for  its  disposition,  each 
theory  suggested  by  the  manner  in  which  the 
disposition  of  the  surplus  is  made,  or  is  supposed 
to  be  made,  at  the  time  when  the  theory  is  formu- 
lated. The  mercantilists,  whose  ideas  of  national 
policy  controlled  Europe  in  the  seventeenth  and 
eighteenth  centuries,  looked  upon  the  struggle 
for  the  surplus  as  taking  place  between  com- 
munities rather  than  between  individuals.  They 
concentrated  their  energies  in  each  country  upon 
the  creation  of  a  favorable  set  of  political,  social, 
and  economic  conditions  for  the  trade  and  indus- 
try of  their  own  people,  striving  to  secure  the 
largest  possible  share  in  every  division  of  land 
or  treasure  which  fortune  opened  to  them  in 
distant  regions  of  the  earth,  and  exacting  heavy 
tolls  for  every  commercial  privilege  granted  their 
neighbors.  In  particular  they  took  strong  meas- 
ures against  the  exportation  of  gold  and  silver 
even  in  exchange  for  goods,  believing  that  a  loss 
of  money  was  an  evil  of  greater  moment  than 
almost  any  other  against  which  it  was  necessary 
to  guard.  By  such  means  they  attempted  to 
secure  for  their  own  nation  the  full  share  in 


384  ECONOMICS 

the  surplus  wealth  to  which  their  strength  and 
ingenuity  entitled  them.  Within  the  community 
the  amount  received  by  each  class  had  long 
been  regulated  chiefly  by  custom.  Each  class 
was  allowed  by  the  community  to  live  in  a 
manner  which  corresponded  with  its  established 
position.  If  the  general  income  increased  this 
became  improved,  but  it  remained  fixed  in  its 
relation  to  the  position  of  other  classes. 

This  system  was  displaced  in  the  latter  part 
of  the  eighteenth  century,  in  France,  by  the 
economists  or  physiocrats,  who  denied  any 
peculiar  advantage  to  the  possession  of  money 
or  the  maintenance  of  commercial  restrictions. 
All  net  surplus,  they  taught,  comes  from 
agriculture.  Those  who  engage  in  commerce 
and  manufactures  consume  exactly  as  much  as 
they  produce.  Those  who  cultivate  the  soil 
alone  produce  more  than  is  consumed  in  culti- 
vation, and  the  whole  community  therefore  de- 
pends upon  its  agriculture  for  its  increase  of 
wealth.  Public  burdens  should  be  placed  upon 
land,  where  it  must  ultimately  fall,  and  all  other 
occupations  should  be  left  free  from  both  bur- 
dens and  restrictions.     The  cooperation  of  nat- 


DISPOSITION  OF  THE  SOCIAL   SURPLUS      385 

ure  was  thought  by  this  school  of  economists 
to  be  the  real  source  of  surplus  wealth.  The 
modification  which  they  proposed  in  its  disposi- 
tion did  not  reach  so  far  as  a  positive  distribu- 
tion among  different  classes.  They  proposed 
simply  that  all  classes  should  be  put  upon  an 
equal  footing  by  a  removal  of  the  positive  regu- 
lations and  restrictions  imposed  in  the  mercan- 
tilist system  and  a  transfer  of  public  burdens 
to  bring  them  as  near  as  possible  to  the  source 
of  all  surplus  wealth  —  agricultural  produce. 

Adam  Smith,  whose  Wealth  of  Nations  ap- 
peared in  1776,  likewise  favored  a  removal  of 
restrictions  and  an  introduction  of  complete 
commercial  and  industrial  freedom.  But  he 
thought  that  the  surplus  came  rather  from  the 
division  of  labor,  by  which  he  meant  the  whole 
organization  of  industry.  His  urgent  plea  is  for 
the  abolition  of  all  traces  of  the  mercantile  and 
colonial  systems,  leaving  each  person  free  to 
choose  his  own  interest  and  to  establish  such 
economic  relations  with  fellow-workers  as  would 
be  to  his  advantage.  Adam  Smith  is  remem- 
bered by  people  in  general  chiefly  for  his  attack 
on  the  mercantilist  teachings  and  on  the  system 

2C 


386  ECONOMICS 

of  protective  tariffs,  bounties,  and  restrictions  on 
labor,  but  his  work  is  of  interest  to  students 
of  economics,  not  for  those  things  alone,  but 
even  more  for  his  complete  demonstration  of 
the  general  principle  of  industrial  and  commer- 
cial freedom,  and  for  the  manner  in  which  the 
operation  of  self-interest  works  to  the  advantage 
of  society.  The  surplus  will  distribute  itself,  if 
there  is  no  interference,  in  such  a  way  as  most  effi- 
ciently to  promote  industry  and  the  general  good. 
The  socialist  theory,  held  by  many  who  desire 
to  abolish  the  present  industrial  system  of  wages, 
private  property,  and  private  contract,  is  that  the 
surplus,  though  created  by  labor,  is  seized  by 
those  who  control  the  physical  means  of  produc- 
tion, such  as  land  and  capital,  and  that  the  labor- 
ers who  do  not  own  property  may  be  kept  at 
the  verge  of  starvation,  with  incomes  only  large 
enough  to  keep  up  the  necessary  supply  of  labor- 
ers. The  law  of  population,  the  law  of  rent, 
and  the  peculiar  explanation  of  the  nature  of 
capital  worked  out  by  Karl  Marx  and  others, 
constitute  an  argument  for  transferring  the  en- 
tire control  of  the  instruments  of  production  to 
the  State.    It  is  claimed  that  the  surplus  belongs 


DISPOSITION  OF  THE  SOCIAL  SURPLUS      387 

to  all  and  that  all  should  share  in  its  enjoyment. 
*'  From  each  according  to  his  abilities ;  to  each 
according  to  his  need,"  is  a  favorite  saying  of 
those  who  hold  to  this  view. 

Still  another  method  of  accounting  for  and 
disposing  of  the  surplus  may  be  mentioned.  It 
is  held  by  those  who  look  upon  rent  as  the  only 
real  surplus,  and  who  propose  a  single  tax  on 
land  values  as  the  solution  of  the  problem  of 
poverty  and  the  condition  of  social  progress. 
All  incomes  may  be  reduced  to  rent,  wages,  or 
interest.  The  law  of  wages,  as  given  by  Henry 
George,  is  that  laborers  will  receive  all  that  their 
labor  can  produce  upon  the  poorest  land  which 
it  is  necessary  to  cultivate.  The  law  of  interest 
is  that  capital  will  receive  whatever  capital  adds 
to  labor  when  employed  upon  the  poorest  land 
which  it  is  necessary  to  cultivate.  Even  on  better 
grades  of  land,  capital  and  labor  will  obtain  only 
these  minimum  shares,  the  balance  of  the  product 
going  to  the  owners  of  the  better  grades  of  land 
as  rent.  It  is  the  landlords  alone,  therefore, 
who  receive  a  surplus  share,  and  the  right  way 
of  securing  this  surplus  for  the  community  is  to 
abolish  private  property  in  land, — leaving  the 


388  ECONOMICS 

owners  in  possession,  but  depriving  them  of  all 
advantage  from  the  superior  quality  of  their 
land  by  taxation.  It  is  thought  by  advocates 
of  the  single  tax,  that  the  revenue  from  this 
source  would  be  so  large  that  all  other  forms 
of  taxation  could  be  abolished,  and  that  the  sur- 
plus obtained  would  be  sufficient,  not  only  to 
meet  the  expenses  of  all  activities  now  under- 
taken by  the  State,  but  to  enable  it  to  undertake 
vast  improvements  in  the  direction  of  better 
schools,  libraries,  parks,  roads,  etc.,  and  even  to  . 
completely  abolish  poverty  and  want. 

No  one  has  yet  ventured  to  say  that  wages 
are  the  only  true  surplus,  although,  as  will  be 
seen  from  the  preceding  paragraphs,  this  claim 
has  been  put  forward  for  the  returns  from  nat- 
ure, capital,  money,  industrial  freedom,  and 
land.  But  in  his  theory  of  wages,  one  of  the 
most  eminent  American  economists,  Francis  A. 
Walker,  comes  near  taking  this  position.  In 
his  theory  of  distribution,  wages,  though  they 
do  not  absorb  the  entire  surplus,  are  neverthe- 
less the  residual  share,  and  it  is  to  wages  that 
all  the  gains  are  added  which  spring  from 
improvements  in  the  arts  or  more  efficient  pro- 


DISPOSITION  OF  THE   SOCIAL   SURPLUS      389 

duction,  whatever  the  cause,  unless  these  im- 
provements are  of  a  kind  that  call  in  new  grades 
of  land  and  so  increase  rent,  increase  the  demand 
for  capital  and  so  raise  interest,  or  enable  a 
poorer  class  of  employers  to  survive  and  so  in- 
crease profits.  It  is  held  by  Walker  that  there 
is  a  definite  law  of  rent,  as  set  forth  in  the  early 
part  of  this  chapter,  and  a  law  of  profits  closely 
corresponding  to  the  law  of  rent,  based  on  dif- 
ferences in  the  managing  abilities  of  employers, 
as  rent  is  based  on  differences  in  soils.  Interest 
is  determined,  according  to  Walker's  theory  of 
distribution,  by  the  supply  of  and  the  demand 
for  capital,  the  rate  always  rising  or  falling  in 
such  a  way  as  to  maintain  an  equilibrium  between 
them.  Thus,  there  is  a  law  for  rent,  for  profits, 
and  for  interest,  definitely  fixing  the  amount 
that  can  be  claimed  by  landlords,  employers,  and 
capitalists.  All  that  remains  is  wages.  Labor- 
ers are  the  residual  claimants,  and,  if  they  are 
intelligent  and  look  to  their  interest,  they  will 
have  no  difficulty  in  securing  the  chief  benefits 
of  progress,  whether  it  take  the  form  of  improve- 
ments in  the  arts,  social  development,  or  in- 
creased resources.     If  new  lands  are  discovered, 


390  ECONOMICS 

it  is  probable  that  the  result  will  be  to  reduce 
rents  and  increase  wages.  If  capital  is  increased, 
interest  will  fall  and  wages  rise.  If  employers 
of  a  higher  grade  replace  those  who  are  incom- 
petent, the  total  amount  of  profits  will  be  less 
rather  than  greater,  and  wages  will  absorb  what 
is  thus  set  free.  The  laborers  are,  therefore,  in 
a  favorable  economic  position,  whatever  the  char- 
acter of  the  improvement ;  and  although  they  do 
not  obtain  the  whole  surplus,  they  secure  by  far 
the  larger  part. 

The  student  may  find  himself  by  this  time 
sadly  puzzled  to  know  what  is  the  real  truth  of 
the  matter.  If  the  opinions  of  those  who  have 
studied  industrial  conditions  closely  differ  so 
widely,  is  there  any  way  of  finding  out  what 
does  become  of  the  goods  produced  by  society  ; 
whether  capitalists,  landlords,  employers,  or 
laborers  get  the  surplus ;  or  whether  all  share 
in  it ;  and,  if  the  latter,  whether  there  is  any 
way  of  telling  which  shares  of  the  surplus  will 
be  liberal  and  which  ones  will  be  small  .-* 

The  truth  seems  to  be  that  the  surplus  is  dis- 
tributed with  as  great  regularity,  and  as  strictly 
in  accordance  with  law   as   are   the  minimum 


DISPOSITION  OF  THE   SOCIAL  SURPLUS       39 1 

shares  ;  but  that  it  is  not  always  the  same  class 
that  holds  the  favored  position.  At  one  time 
capital,  at  another  land,  at  another  managing 
ability,  and  at  another  labor,  may  be  able  to  se- 
cure for  itself  the  free  surplus.  At  any  given 
time  that  one  of  the  factors,  necessary  in  pro- 
duction, which  is  increasing  at  the  slowest  rate, 
will  be  able  to  secure  the  benefits  of  the  im- 
provements in  production  and  to  reduce  the 
shares  of  the  other  factor  as  nearly  as  possible 
to  the  minimum  fixed  by  the  laws  of  cost.^  It 
is  this  share  also  which  must  bear  the  perma- 
nent burdens  of  society.^  At  the  time  of  the 
Napoleonic  wars,  the  price  of  food  rose,  agricul- 
tural products  increased  in  value,  there  was  a 
strong  demand  for  land,  and  rent  became  in  Eng- 
land the  share  which  most  attracted  attention. 
The  supply  of  land  could  not  keep  pace  with  the 
demand  for  food  ;  cultivation  was  pushed  down 
to  poorer  lands,  and  the  income  from  other 
sources  than  land  was  very  much  reduced. 
Under  those  circumstances,  rent  was  the  share 
which  took  the   surplus,  because  land  was  the 

1  Patten,  The  Stability  of  Prices,  p.  31. 
a  Ibid. 


392  ECONOMICS 

factor  in  production  most  urgently  in  demand, 
and  it  was  land  which  eventually  bore  the  per- 
manent burdens. 

In  a  later. period  the  industrial  revolution  and 
the  changes  in  demand  created  an  altogether 
new  place  for  capital.  The  opening  up  of  new 
countries,  and  the  improvements  in  transporta- 
tion, made  land  more  plentiful,  but  capital  was 
lacking  to  take  advantage  of  the  new  opportuni- 
ties. The  land  could  be  had  for  little,  because 
its  owners  were  competing  with  each  other  for 
the  capital  necessary  to  develop  it.  Wages 
were  low  because  the  new  industrial  processes 
had  lessened  the  demand  for  labor  in  particular 
industries,  and  because  in  England  a  vicious 
system  of  poor  relief  reduced  the  general  stand- 
ing of  living  and  unduly  stimulated  the  growth 
of  population.  The  most  slowly  increasing  fac- 
tor was  capital,  or  rather  capital  and  managing 
ability  combined,  for  they  were  not  yet  easily 
separated,  as  became  possible  afterwards  with 
the  extension  of  credit.  Profits  (including  in- 
terest) were,  therefore,  the  share  which  increased 
so  enormously  as  to  excite  the  apprehension  of 
socialists,  trade-unions,  and  cooperative  leaders. 


DISPOSITION   OF  THE   SOCIAL   SURPLUS      393 

It  was  thought  that  the  interests  of  capital  and 
labor  were  in  direct  conflict,  no  account  being 
taken  of  rent.  The  possession  of  capital  was 
seen  to  be  the  means  by  which  the  largest  share 
in  the  surplus  of  society  was  secured,  and  it 
brought  as  its  penalty  the  necessity  of  providing 
for  the  burdens  of  society.  If,  for  example,  a 
poll-tax  was  levied  on  laborers,  it  was  thought 
that  it  would  be  shifted  to  capitalists,  since 
laborers  only  received  sufficient  for  maintenance, 
and  they  could  pay  the  tax  only  by  securing  a 
corresponding  increase  of  wages. 

We  have  been  passing  through  a  period  in 
America  in  which  not  land,  nor  labor,  nor  capi- 
tal was  the  most  slowly  increasing  factor,  but 
rather  managing  ability.  The  opportunities  for 
developing  new  industries  and  the  supply  of  all 
the  essential  physical  factors  have  been  present 
in  greater  abundance  than  the  organizing  skill 
and  enterprise  required  to  make  them  really 
productive.  The  lack  has  not  been  greater  than 
in  other  countries,  but  has  only  been  relatively 
noticeable  in  comparison  with  the  supply  of 
other  factors.  Profits  in  the  narrower  sense, 
independent  of  interest,  as  a  return  for  superior 


394  ECONOMICS 

management,  have  been  large  because  the  men 
who  have  the  qualities  displayed  by  the  cap- 
tains of  industry  have  been  rare,  and  those  who 
have  appeared  have  been  able  to  secure  the 
other  requisite  factors  on  easy  terms.  Monop- 
olies have  arisen  under  these  conditions,  and 
the  taxation  of  monopolies  has  been  a  source 
from  which  communities  have  been  able  to  se- 
cure a  large  part  of  their  revenues,  though  not 
so  much  has  been  made  of  this  opportunity  as 
might  have  been.  Permanent  burdens  have 
rested  in  this  instance,  as  in  the  earlier  ones, 
upon  the  factor  which  was  able  to  secure  the 
largest  part  of  the  surplus. 

The  nearest  rival  for  the  lion's  share  of  the 
surplus  product  has  been,  not  capital,  nor  land, 
but  labor.  The  fall  in  the  price  of  food  indicates 
a  rise  rather  than  a  fall  in  the  margin  of  cultiva- 
tion. The  differences  in  the  qualities  of  soils 
have  become  less  rather  than  greater.  Rent  has 
diminished  rather  than  increased,  except  in  the 
special  instances  of  ground  rents,  of  terminal 
facilities,  and  of  favored  building  spots  which 
follow  the  law  of  profits  rather  than  that  of  rent. 
The  rate  of  interest,  after   eliminating  the  ele- 


DISPOSITION  OF  THE   SOCIAL   SURPLUS      395 

ment  of  risk,  has  considerably  fallen.  Capital 
is  saved  for  a  much  smaller  reward  than  formerly. 
The  appreciation  of  future  wants  has  become 
more  general.  Neither  rent,  nor  interest,  have 
been  increasing  their  portion  of  the  surplus, 
though  it  is  from  the  surplus  that  both  are  drawn 
in  the  first  instance.  In  the  competition  be- 
tween employers  and  laborers  for  the  surplus 
product,  the  present  tendencies  seem  to  favor 
wages  and  not  profits.  It  is  true  that  there  is  a 
large  class  of  unemployed,  and  that  in  excep- 
tional cases  it  is  still  possible  to  make  extraor- 
dinary profits.  But  the  number  of  employers 
who  are  capable  of  organizing  some  special  in- 
dustry profitably  is  increasing.  This  works  to 
the  advantage  even  of  the  unemployed,  for  one 
reason  of  their  lack  of  employment  is  the  absence 
of  men  of  this  kind.  If  there  are  enough  ef- 
fective managers  to  utilize  all  the  good  oppor- 
tunities for  industrial  activity,  it  will  go  far 
toward  giving  employment  to  all.  Increased 
steadiness  of  demand  enables  an  employer  of 
even  moderate  ability  to  keep  his  establishment 
in  operation.  Demand  for  new  commodities 
calls  for  abilities  of  a  kind  not  already  in    use. 


396  ECONOMICS 

New  discoveries  make  possible  the  establishment 
of  an  industry  in  a  new  place,  on  a  more  eco- 
nomical basis,  or  with  a  different  kind  of  motive 
power.  The  development  of  new  qualities  in 
the  laborers  permits  the  introduction  of  an  in- 
dustry from  a  foreign  country.  Many  similar 
tendencies  are  at  work,  the  effect  of  which  is  to 
increase  the  rate  at  which  employing  and  man- 
aging ability  is  supplied,  and  so  to  reduce  the 
rewards  of  the  few  who  have  supplied  it.  It 
would  seem  that  in  the  near  future,  effective 
labor  is  more  likely  to  be  the  limiting  factor  than. 
any  other.  If  it  should  be  true  that  land,  capi- 
tal, and  directive  intelligence  are  all  supplied  at 
a  more  rapid  rate  than  efficient  labor,  then  we 
may  expect  to  see  wages  remain,  as  it  has  to 
some  extent  already  seemed  to  be,  the  residual 
claimant  on  the  industrial  product,  the  natural 
heir  to  all  the  improvements  that  come  from 
industrial  and  social  progress.  To  maintain 
such  a  position  there  must  exist  a  high  standard 
of  living  and  a  series  of  social  institutions  which 
prevent  an  undue  pressure  of  population,  and  se- 
cure adequate  hours  of  recreation  and  the  main- 
tenance of  a  high  type  of  family  and  social  life. 


INDEX 


Absolute  utility,  8i,  82,  97,  98, 
123. 

Abstinence,  309,  312. 

Accounts,  book,  246-8;  bank, 
249-52. 

Adams,  H.  C,  330. 

Agricultural  chemistry,  38,  39. 

American  Academy  of  Political 
and  Social  Science,  2,  89, 
123. 

American  Economic  Associa- 
tion, 265. 

American  Encyclopaedia,  38. 

American  Institute  of  Educa- 
tion, 322. 

Andrews,  264,  265. 

Annals  of  the  American  Acad- 
emy, 89, 123. 

Appetites,  changes  in,  95-7, 
150. 

Atwater,  38,  71. 

Balance  of  trade,  235-8,  254. 

Bank  accounts,  249-52;  bank- 
ing, etc.,  see  the  organization 
of  credit;  notes,  257-60. 

Barter,  187-93,  214. 

Bills  of  exchange,  235-6,  254- 

255- 
Book  accounts,  246-8. 


Cairnes,  80. 

Capital,  265-77,  292,  309-16, 
360,  392-3;  active,  265;  cir- 
culating, 268-70;  money  as, 
275-7;  340-1;  fixed,  268-70, 
340-1 ;  and  its  earnings, 
Clark,  265;  increase  of,  121, 
139-40;  industry  limited  by, 
339;  passive,  264;  saving  as 
source  of,  271-5,  362-3; 
specialized,  270-1. 

Charity,  4. 

Checks,  bank,  249-53,  260. 

Children,  workers  in  prepara- 
tion, 7. 

Child  labor,  371-2. 

Church,  The,  51. 

Circulating  capital,  268-70; 
money  as,  275-7. 

Civic  relations,  compared  with 
economic,  5. 

Clark,  113,  158,  263,  264. 

Clearing-house,  252-3. 

Climate,  28-33,  366. 

Coinage,  219-21,  242;  silver, 
225. 

Commerce,  see  distribution  of 
products. 

Commodity  defined,  77. 

Communists,  14. 


397 


398 


INDEX 


Complementary  goods,  99-100. 
Complements,  1 21,  147;  utility 

of,  99-104,  128-9,  151- 
Configuration,       geographical, 

40-2. 
Consumers,  cooperation  of,  121, 

125-7- 

Consumption,  79;  defined,  77; 
economic  order  of,  85,  93-8, 
109,  146,  149-50;  economies 
of,  130,  131;  harmony  in,  97- 
100;  increase  in  variety  of, 
97-8,  121-3,  151;  margin  of, 
107-11,  167;  limitations  of, 
73-5 ;  normal  and  primitive, 
100;  the  consumption  of 
goods,  73-92;  the  con- 
sumption of  w^ealth.  Patten, 
94;  propositions  concerning 
consumption,  93-1 1 1 ;  pro- 
ductive, 78;  social,  117;  so- 
cializing of,  121,  123-5,  127; 
the  starting  point,  91;  and 
taxation,  94;  test  of,  77-8. 

Cooperation,  of  consumers,  121, 
125-7;  industrial,  321-2. 

Cost,  155;  changes  in  relative, 
93-4, 146-8;  consumers',  154, 
155,  156,  160,165;  law  of,  in 
distribution,  381-2;  subjec- 
tive, 80;  and  utility,  115, 
133-4;     and    value,    154-6, 

333-7- 

Costs,  social,  117;  and  surplus, 
112,  114;  see  disposition  of 
social  surplus. 

Credit,  56-7,  197-8;  inter- 
national, 216,  254;  the  or- 
ganization of  credit,  239-60. 


Crops,  rotation  of,  308-9. 
Cultivation,     margin    of,    349, 

350;   of  plants,  71. 
Cunningham,  244. 
Currency,    excess   of,    229-32; 

paper,  216,  257-60. 

Debtors,  social,  4-14. 
Decimal  system,  221. 
Demand,  for  commodities,  not 

a  demand  for  labor,  340. 
Dependents,     compared     with 

economic  men,  4-14. 
Diet,  373. 
Diminishing    returns,    law   of, 

346-7,  357-60. 
Diminishing  utiUty,  85-9, 160-9. 
Disposition  of  the   social  sur- 
plus, 375-97- 
Distribution,  14;  as  determined 

by  a  law  of  rent,    113;    of 

money,  international,  231-3; 

of  products,   the,    1 78-210; 

of  wealth,  see  disposition  of 

the  social  surplus. 
Diversification  of  industry,  297. 
Division  of  labor,  121,  134-8, 

182-5,  203,  294-5,  298,  31 7» 

323-7,  385- 
Draft,  253. 
Dynamic    economics,     Patten, 

82,  92,  115,  148. 

Earth,  the,  and  man,  Guyot, 
26;  as  modified  by  human 
action.  Marsh,  28. 

Economic,  environment,  the, 
16-44,  73;  function  of  wom- 
an, 2;    ideal,  ii;  man,  the. 


INDEX 


399 


I-15;  order  of  consumption, 
85*  93-8,  109,  146,  149-50; 
progress,  goal  of,  62;  society, 
social  condition  of,  10,  45-59. 

Economics  defined,  i. 

Economics,  Hadley,  260. 

Economies     of     consumption, 

130.   131- 
Education,     51-2,     121,     140, 
152-3,  207,   286-7,   289-92, 

372. 
Effective  utility,  154,  158,  165. 
Energy,  physical,    18-24,    262, 

277-80. 
England,  bank  of,  243, 
Environment,  107-10;  capacity 

of,  84;  creation  of  a  new,  63, 

68-71 ;  the  economic,  16-44; 

and  welfare,  73. 
Equals,  economic,  9,  ii. 
Exchange,  see  distribution   of 

products,  the;  bills  of,  235-6, 

254-5- 

Expenses  of  production,  and 
profits,  352-4;  and  rent, 
350-2;  and  value,  333-7. 

Extractive  industries,  72, 

Factory  system,  the,  199-200. 

Fairs,  202. 

Familiar  principles,  restatement 

of,  323-55- 
Family,  the,  48-50,  125-6,  211. 
Fawcett,  284. 

Final  increments,  104-7,  ^^6. 
Final  utility  and  value,  162-77. 
Fixed  capital,  268-70,  340-1. 
Food    supply,   of   the    future, 

Atwater,  71;  irregularity  of, 


95;  and  standard  of  living, 

145- 

Force,  muscular,  23. 

Forces  of  nature,  18,  24;  locali- 
zation of,  63-5;  periodic 
action  of,  63-4;  serial  action, 

65-7- 

Forests,  306-8;  effect  on  cli- 
mate, 30. 

Form,  permanence  of,  67-8. 

Freedom  of  trade,  327-30. 

Fundamental  idea  of  capital, 
Patten,  263. 

Future  goods,  262-77,  310. 

Gaye,  30. 

Geographical  configuration, 
40-2;  differences,  26. 

George,  Henry,  387. 

Gibbons,  202,  222. 

Gide,  272,  279,  284. 

Giving,  indiscriminate,  368. 

Gold,  43, 195,  215,  217-19,  222. 

Goldsmiths,  244. 

V.  d.  Goltz,  sS. 

Good,  defined,  60. 

Goods,  complementary,  99-100; 
the  consumption  of,  73-92; 
defined,  fy;  free,  60;  future, 
262-77,  310;  the  making  of, 
60-72,  179;  the  ownership 
of,  90;  present,  263,  310, 
312-5;  sources  of,  i;  value 
of  intermediate,  310. 

Government,  366-7. 

Gravitation,  22-3. 

Great  world's  farm,  the,  Gaye, 
30. 

Gregory,  83. 


400 


INDEX 


Gresham's  law,  229. 

Group,  discordant,  loi;  natu- 
ral, 100;  utility  of,  99-104, 
128-9,  151- 

Guyot,  26. 

Hadley,  260. 

Harmony  in  consumption,  97, 

100. 
Heat,  20-1. 
Heredity,  49. 
History  of  commerce  in  Europe, 

the.  Gibbons,  202,  222. 

Immorality,  367-8. 

Imputation  of  utility,  102-4,  I47> 
149. 

Income,  143,  148,  15 1-3,  380; 
increased  by  saving,  274-5. 

Increments,  final,  104-7,  ^^^J 
initial,  105;  marginal,  104, 
iio-ii;  succession  of,  85, 
104,  108. 

Indirect  utility,  S;^. 

Industrial  cooperation,  321-2; 
progress,  iii,  140-2,  167, 
321;  qualities,  transmission 
of,  121,  140;  society,  178. 

Industry,  diversification  of,  297 ; 
efficiency  of,  317-19;  limited 
by  capital,  339;  organization 
of,  121,  137-8,  261-99,  3I7» 
385;  proposition  concerning, 
300-22. 

Inheritance,  318. 

Initial  increments,  105;  utility, 
161,  163,  166,  170,  197. 

Institutes  of  economics,  An- 
drevi^s,  264. 


Institutions,  social,  45. 

Intelligence,  262, 287-92,363-4. 

Intemperance,  367-8. 

Interest,  255-7,  276,  312;  see 
disposition  of  the  social  sur- 
plus; and  profits,  342. 

Intermediate  goods,  value  of, 
310. 

International  credit,  216,  254; 
distribution  of  money,  231-3. 

Interpretation  of  nature,  Sha- 
ler,  21. 

Invention,  121,  140,  325. 

Iron,  42. 

Irregularity  of  food  supply,  95. 

Isotherms,  31. 

James,  322. 

Knowledge,  diffusion  of,  320-2. 
Krohn,  372. 

Light,  21. 

Living,  the  standard  of,  143-53. 

Localization   of  industry,  294, 

295-6;  of  natural  forces,  63, 

64-5- 

Land,  121, 139-40,  277-80,  292, 
300-9,  346-52,  391-2;  pri- 
vate property  in,  388. 

Law  of  progress,  iio-ii. 

Legal  tender,  226-9. 

Labor,  23,  280-7,  292,  365, 
394-7;  division  of, 1 2 1, 134-8, 
182-5,  203,294-5,  298,  317 
323-7,  385;   organization  of, 

329. 
Luxuries,  143,  146,  148;  in  xvi. 
Cent.,  199. 


INDEX 


401 


Machinery,    effect     on     labor, 

284-5. 

Malthus,  345. 

Man,  the  economic,  I-15;  and 
environment,  107-10. 

Margin  of  consumption,  107-II, 
167;  of  cultivation,  349,  350. 

Marginal  increments,  104,  iio- 
II. 

Marginal  utility,  162-77,  189, 
196,  211;  of  money,  223. 

Market,  201-10,  211,  337-8. 

Market  value,  13,  14,  169-77. 

Marshall,  91,  96,  296. 

Marsh,  George  P.,  28. 

Marx,  Karl,  386. 

Medium  of  exchange,  money 
as,  234;  see  money,  and  dis- 
tribution of  products. 

Mercantilists,  383-4. 

Mill,  269,  272,  284,  298,  315, 

339- 

Mineral  resources,  42-3. 

Money,  195,  211-38;  see  or- 
ganization of  credit,  239-60; 
as  circulating  capital,  275-7, 
340-1 ;  international  distri- 
bution of,  231-3;  marginal 
utility  of,  223;  mercantilists' 
theory,  383-4;  representative, 
216,  224-6. 

Moral  qualities,  121,  140. 

Muscular  force,  23. 


National  conference   of  chari- 
ties and  correction,  372. 
Nature,  forces  of,  18,  24. 
Necessaries,  146,  148. 


Negative  utilities,  81,  82,  97-8, 

lOI. 

Neutral  utility,  82,  98. 

New  resources,   utilization   of, 

129-31. 
Nitrogen,  as  plant  food,  39. 
Normal  consumption,  100. 
North  America,  climate  of,  31; 

geographical      configuration 

of,  40-2. 

Obstacles  to    social    progress, 

356-74. 
Ocean    currents   and    climate, 

30. 

Order  of  consumption,  eco- 
nomic, 85,  93-8,  109,  146, 
149-50;  natural,  85. 

Organization  of  credit,  the, 
239-60. 

Organization  of  industry,  the, 
121,137-8,261-99,317,385; 
of  labor,  329. 

Organization,  social,  57-8. 

Overcrowding,  370-1. 

Pain,  in  production,  80,   Ii8; 

defined,  80. 
Paper  currency,  216,  257-60. 
Partnership,  255. 
Passive  capital,  264. 
Patten,  vi,  63,  82,  92,  94,  I15, 

148,  263,  265,  391. 
Periodic  action  of  natural  forces, 

63-4. 
Permanence  of  form,  67-8. 
Philosophy   of  wealth,    Clark, 

158,  263. 


402 


INDEX 


Physical  energy,  18-24,  262, 
277-80. 

Physical  science,  and  econom- 
ics, 16. 

Physiocrats,  355,  384-5. 

Plant   food,    38;    nitrogen   as, 

39- 
Plants,  cultivation  of,  71. 
Pleasure  from   complementary 

goods,  99-100. 
Political  economy,  Gregory,  83. 
Population,    121,    140,    303-4; 

and    means    of    subsistence, 

344-6. 
Positive  utilities,  substitution  of, 

121,  123,  147. 
Positive  utility,  79,  81,  82,  97-8, 

loi,  159. 
Present  goods,  263,  310,  312-5. 
Price,  229-38,  337-8- 
Primitive  consumption,  100. 
Principles  of  economics,  Mar- 
shall, 91,  296. 
Principles  of  political  economy, 

Mill,    269,    284,   298;  Gide, 

272,  279. 
Principles,  restatement  of  famil- 
iar, 323-55. 
Private  property,  361;  in  land, 

388. 
Produce,     distinguished     from 

products,  263. 
Production,  78,    79;    expenses 

of,  and  profits,   352-4;    and 

rent,  350-2. 
Productiveness,  test  of,  354-5. 
Products,    the    distribution   of, 

178-210;  unfinished,  262-77. 
Profits,  341-3,  393-4;  and  ex- 


penses of  production,  352-4; 
see  disposition  of  social  sur- 
plus. 

Progress,  defined,  356;  goal  of 
economic,  62;  law  of,  iio- 
II;  industrial,  in,  140-2, 
167,  321;  obstacles  to  social, 
356-74;  social,  iio-ii, 
140-2,  167. 

Promissory  notes,  255-7. 

Property,  11,  53-4;  private, 
361 ;  in  land,  388. 

Propositions  concerning  con- 
sumption, 93-1 1 1. 

Propositions  concerning  indus- 
try, 300-22. 

Prosperity,  social,  1 12-142. 

Quarterly  Journal  of  Economics, 
263. 

Relation  of  State  to  industry, 
the,  Adams,  330. 

Religion,  50- 1. 

Rent,  303,  347-52;  and  ex- 
penses of  production,  350-2; 
see  disposition  of  the  social 
surplus. 

Representative  money,  216, 
224-6. 

Representative  value,  194. 

Residual  share,  v^^ages  as,  388- 
90,  396. 

Resources,  mineral,  42-3;  utili- 
zation of  new,  129-31. 

Restatement  of  familiar  princi- 
ples, 323-55- 

Returns,  law  of  diminishing, 
346-7,  357-60. 


INDEX 


403 


Roman  empire,  physical  basis 

of,  28. 
Rotation  of  crops,  308-9. 

Saving,  as   source   of   capital, 

271-5,  362-3. 
Scale  of  diminishing   utilities, 

86-9,  106,  108,  117. 
Schonberg's  Handbuch,  38. 
Security,  lack    of,  an  obstacle 

to  social  progress,  360-2. 
Serial  action  of  natural  forces, 

65-7- 

Shaler,  21. 

Silver,  43,  215,  217-19;  coin- 
age of,  225, 

Single  tax,  387-8. 

Smart,  89,  123. 

Smith,  Adam,  323,  355,  385-6. 

Social  conditions  of  an  eco- 
nomic society,  the,  lo,  45-59. 

Social  consumption,  117. 

Social  costs,  117. 

Social  institutions,  45. 

Social  organization,  57-8. 

Social  progress,  iio-ii,  140-2, 
167;  defined,  356;  obstacles 
to,  356-74. 

Social  prosperity,  112-42. 

Social  surplus,  115,  355;  dispo- 
sition of  the,  375-97. 

Social  value,  169-77, 

Socialists,    14,  386-7. 

Socializing  of  consumption,  121, 
123-5,  127. 

Society,  industrial,  178. 

Soil,  fertility  of,  and  rent,  347-9 ; 
origin  and  composition  of, 
33-9,  302-3. 


Specialized  capital,  270-1. 
Stability  of  prices,  Patten,  391. 
Standard  of  living,  the,  143-53, 

208-10;    defined,    143;    and 

income,  143. 
Standard  of  value,  192-5;  see 

money. 
State,  the,  52-3. 
Steam,  199.  * 

Subjective  cost,  80. 
Subsistence,   expense    of,    and 

M^ages,  343-4;    and   popula- 
tion, 344-6. 
Substitution  of  positive  utilities, 

121,  123,  147. 
Supply,  169,  172-7. 
Surplus,  114;  utility,  112;  social, 

^^5^     3555     disposition    of, 

375-97- 

Taxation,  54-6;  and  consump- 
tion, 94. 
Teachers,  economic  services  of, 

52- 
Temperate  zone,  31. 
Territorial    division    of    labor, 

121,  136-7,   294. 
Theory   of  social   forces,    the. 

Patten,  63. 
Trade,  balance  of,  235-8,  254; 

freedom  of,  327-30. 
Transportation,     121,      138-9, 

198-200,  303-4. 

Unfinished  products,  262-77. 

Unit  of  value,  191-2. 

Utilities,  creation  of,  77;  de- 
struction of,  78;  discordant, 
100-2;  social,  116;   increase 


404 


INDEX 


of,  121;  defined,  77;  dimin- 
ishing, 85-9,  160-9;  effective, 
154,158, 165;  final,  and  value, 
162-77  ;  imputed,  102-4,  I47j 
149;  indirect,  83;  initial,  161, 
163,  166,  170,  197;  marginal, 
162-77,  189,  196,  211;  nega- 
tive, 81,  82,  97-8,  loi ;  neu- 
tral, 82,  98;  positive,  79,  8r, 
82,  97-8,  loi,  159;  substitu- 
tion of  positive,  121,  123, 
147;  and  welfare,  168. 
Utility,  77,  154;  absolute,  81, 
82,  97,  98,  123;  of  comple- 
ment, 99-104,  128-9,  151; 
and  consumption,  89;  and 
cost,  115,  133-4;  surplus, 
112;  and  value,  89,  90. 


Value,  13,  i54-77»  189,  211, 
267;  and  cost,  154-6,333-7; 
defined,  154;  and  expenses 
of  production,  333-7;  of  in- 
termediate goods,  310;  mar- 
ket, 13, 14, 169-77;  of  money, 
230-8;  representative  of,  194; 
social,  169-77;  standard  of, 


192-5,  see  money;  unit  of, 
191-2;  and  utility,  89,  90; 
and  welfare,  168. 

Variety  of  consumption,  in- 
crease in,  97-8,  121-3,  151. 

Vegetable  mould,  37. 

Venice,  bank  of,  240. 

Wages,   143,   144,  343-4;   see 

disposition  of  social  surplus; 

as    residual    share,    388-90, 

396. 
Walker,  352,  388,  389. 
Wants,  described,  2-3,  91,  109, 

iio-ii,  208,  300-1. 
War,  369. 
Waste,  78-9. 
Water,  in  the  making  of  soil, 

35- 

Wealth,  defined,  i,  79,  212, 
213;  distribution  of,  see  dis- 
position of  the  social  sur- 
plus. 

Wealth  of  nations.  Smith,  323, 
385-6. 

Welfare,  economic  environment 
and,  73;  and  value,  168. 

Wells,  David,  323. 


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